---
title: "What is Yield?"
description: "What is yield? How measuring future income from an investment works--and why it matters."
canonical_url: https://trendshare.org/how-to-invest/what-is-yield
markdown_url: https://trendshare.org/ai/what-is-yield.md
published: 2018-05-13
last_updated: 2018-05-14
content_license: https://trendshare.org/about/disclaimer
---
# What is Yield?

Source: https://trendshare.org/how-to-invest/what-is-yield
Updated: 2018-05-14
For any investor, the most important question about any investment is "how
much money can I make". [Managing risk is important](https://trendshare.org/how-to-invest/what-is-a-margin-of-safety). So is understanding what you're buying. Yet the reason to buy a
stock or bond or ETF is to make money.

Investors have multiple ways to measure the money they expect to get,
depending on their investment strategies. When evaluating investments and
advice, you must understand what people mean when they talk about yield,
return, and types of both.

## Yield is the Money Your Investment Produces

Imagine you loan a friend $1,000 for a year. She agrees to pay you back that
$1,000 in twelve months, as well as $10 a month. For the loan of a thousand
dollars, you'll get back the principal as well as an extra $120. Not bad!

In this simple example, you'll end up with 12% more money at the end of the
year than you started with. Not bad at all!

Yield is the income you can make with an investment in a period of time.
It's the cash you get from making the loan. You'll still get your principal
back, but you get more coming back too.

Don't overthink this.

## Bonds Have Yields

This is easy to understand with loans, where the interest rate times the
principal gives you a number. It's similar with bonds, where the bond rate and
payout periods determine what kind of money you get back and how often you're
paid.

Bonds get a little bit more complicated because you can buy them from other
investors; the yield falls as the price rises. Think of it this way: if someone
else bought the loan to your friend for $1100 and the 12% interest rate stayed
the same, they'd only get $20 for the year, or 1.82% interest. That's a much
different yield from 12%!

## Yield Depends on What You Pay

In other words, the yield depends on both the interest rate and the price
you paid.

This cannot be stressed enough. If you want a higher yield, you either need
to earn more money from your investment every month or pay a lower price for
the investment. This should sound familiar to value investors seeking a
specific [rate of return](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return).

Of course, there are different types of yield you can measure. For this to
make sense, you must know how stocks produce yield.

## Stocks (Can) Have Yields Too

Stocks don't pay interest, but [stocks may pay dividends](https://trendshare.org/how-to-invest/why-do-companies-pay-dividends). If you
bought [Coca-Cola](/stocks/KO/view) at $10 per share and it pays out
$1 in dividends every year, you're earning a 10% yield every year. (This is the
simplest to explain; it's also called a [dividend yield](https://trendshare.org/how-to-invest/what-is-dividend-yield).)

Dividend yield is easy to compare to other investments if you know what you
paid for a stock, but you can't measure what everyone else paid for it. You're
more likely to see the current yield of a stock, which divides the annual
dividend payout with the current price of the stock.

If Coca-Cola is paying out $1 every year and it's currently trading for $20
per share, the current yield is 5%. Again, that's very different from the 10%
if you'd paid only $10 per share.

## What's the Difference Between Yield and Return?

Not all stocks pay dividends. You might earn a great return from an
up-and-coming stock that never pays you a penny. Instead, you'll get money from
selling a share for more than you paid for it. (The same goes for bonds, in
fact.)

Over time, that combination of the profit you made from the sale plus any
dividends you've received while you held the stock makes up your total return.
Just as with yield, the price you paid is the most important factor in your
return.

There's one more essential difference between yield and return. Yield looks
to the future. What can you earn in a year? What dividends will you receive?
What interest payments will you get? These are predictable, to an extent,
depending on the risk of the investment.

Return looks to the past. Yes, it includes interest or dividend payments,
but it also depends on the price at which you sold your investment.

## Should You Maximize Yield or Return?

The real goal of understanding yield and return is to be able to compare
similar investments to meet your investing goals. Any investment that returns
money to you, regularly and predictably, can help you produce regular income
from your investments. If you're trying to live off the proceeds of your
investments now, that can be a great approach.

If you're trying to build wealth for the long term and don't need the money
now, total return is more important. That doesn't mean you should ignore
yield—it can be a great way to improve your returns. Instead, pay
attention to yield but look for good returns from share price appreciation as
well.

In both cases, being careful and deliberate about the price you pay for an
investment will help you improve your yields and total returns.