What is Cash Yield?

How is a Stock Like a Bond or a CD?

Many people prefer simple investments. It's easy to understand a bond or a CD. You hand someone a check for $1000 and in a year they give you back your $1000 plus 2% interest. You've made $20. Easy!

A bond or a CD is a promise that, as long as whoever issued it stays solvent, you'll earn interest until the maturity date. Any good business has the same goal: to earn money every year. Anything can happen, of course, but good companies built to last tend to last.

This difference between stocks and bonds makes buying a bond easier than buying a stock, because you know what to expect. What may surprise you is that you can analyze bond and stock returns the same way. (This is an insight explained in the book Buffettology, by Mary Buffett.) The market may go up, down, or sideways, but if you're careful about what you buy and why, you can have reasonable expectations and buy only good companies with great prospects.

While stock returns often come in the form of increased price (buy low, sell high!), you can make money on dividends and you can project how much the price of a stock will increase over time by how much money the business produces.

(Remember, yield looks forward, while return looks backward.)

How Much Can a Stock Return?

"Wait a minute," you might say. "If a stock has no guaranteed return, how can you determine what that return might be?"

The answer starts with earnings. At the end of the year, how much cash did the business produce? Not how much cash is on the accounting sheet (it's too easy to manipulate that), but how much cash is available in the company's accounts. How many dollar bills could they stack in the lobby? Free cash flow is the measurement of actual money the company has realized. Unlike the income statement, which records revenues and expenses based on accrual accounting, cash flow statements track actual cash movements and are harder to manipulate.

A company that has positive free cash flow made money. A company that has negative free cash flow lost money. Everyone wants to make money. Otherwise, you'll have to keep pouring money into the business to keep it afloat, and you'll eventually run out of money and potential investors. (Enron hid its escapades by manipulating cash flow reporting.) Sure, their accounting sheets showed amazing profits, but you have to pay the electric company with real dollars or they'll turn off your lights.)

Cash Yield and Free Cash Flow Yield

Free cash flow is only part of the story. What did you pay for the stock? Remember the bond: for every $1000 you put into the bond, you earn 2% interest in a year, or $20. In other words, it costs you $1000 to make $20 in a year.

What if you treated a stock's free cash flow like the earnings on a bond? To make this work, divide the free cash of the business by the entire amount of money invested in it. That'd give you an idea of what people are willing to pay to for a business that generates that cash. Remember the definition of cash yiel? That's the ratio of free cash flow to market cap. (People sometimes describe this as free cash flow yield.)

Cash on Cash Yield is a different measurement often used to evaluate real estate investments. Instead of market capitalization, it uses the price you paid for an investment as the denominator. For example, if you paid $100,000 for a rental property that earned you $1000 a month, you'd have a cash on cash yield of $12,000 (12 times $1000) divided by $100,000 or 12% annually.

This calculation is important when evaluating an investment which produces income; it's less useful for stocks, where the current market capitalization and free cash flow represent the market's opinion of the business's ability to generate cash. Because the stock price isn't fixed in the same way a rental property's price might be, you have to use a different valuation mechanism.

How to Calculate Cash Yield

To calculate the free cash flow yield of a stock, you need to know how much it would cost you to buy the entire company right now (market capitalization); the current price of the stock multiplied by the total number of shares available.

If the company has 10 shares available at $1000 apiece, the market capitalization is $10,000. If the company has $200 in free cash flow last year, the cash yield is $200 divided by $10,000, or $20 per $1000 share. That's 2%, the same as the bond.

Here's the fun part. What if the price of the stock goes down to $800? The cash yield of the stock jumps to 2.5%. Even if the company makes the same amount of money next year, each share is worth more because it represents a larger amount of real dollar earnings. (This is different from when the company performs stock buybacks, because that changes the denominator of this ratio.)

Try the Cash Yield Calculator

Use this interactive calculator to compute cash yield for any stock. Try the Coca-Cola or Microsoft examples to see how mature and growth companies compare.

What is a Good Free Cash Flow Yield?

This ratio is a tool; it can't tell you the future of a business. It's a simple piece of information you can use as part of your analysis. What's a good cash yield? It depends; how fast can the business grow? What's the limit on its growth? A Facebook can't double its userbase more than a couple of times without running out of humans, while a smaller company like Electro Scientific Industries has a lot more room to expand.

In general, the higher the free cash flow yield the better. 8% for a mature company such as Coca-Cola would be fantastic. Growth companies or capital-light industries (software, consulting) may show 2-5% cash yield yet still be excellent investments. Keep this number in context with the business model, growth rate, and industry benchmarks.

How to Use Cash Yield

The free cash flow yield ratio is a good metric because it relies on two figures which are difficult for shady businesses to manipulate. You can hide a lot of things in raw earnings, but cash flow is what it is. So is market capitalization.

Once you calculated the free cash yield of a stock, you can compare investing $1000 in the company to buying a bond at $1000. Is the bond safer? Is the company likely to make more money next year? Which is the best investment for you?

As a buy-and-hold investor—someone willing to buy stocks based on their value—the cash yield is an important figure. It helps us decide a fair price for good stocks, and helps us understand companies that aren't really making money. It also provides a baseline for investment safety: a stock that can't beat the return of a government bond isn't worth your time.

Real Company Examples (January 2026)

Coca-Cola is a Mature Dividend Payer

Coca-Cola (KO) illustrates reliable cash yield. Q3 2025 earnings reported trailing twelve-month free cash flow around $11.2 billion (source: Coca-Cola Investor Relations, KO SEC 10-Q). With roughly 2.65 billion shares at $105/share, market cap is approximately $280 billion. This translates to a cash yield of about 4%: modest but steady, and excellent for conservative investors.

Microsoft has High Growth, but Lower Yield

Microsoft (MSFT) shows the growth trade-off. In Q1 FY2026 (Sept 2025), it reported a trailing twelve month free cash flow of approximately $67 billion with a market cap near $3.2 trillion. That makes a cash yield of roughly 2.1%. Why hold it? Microsoft reinvests heavily into cloud infrastructure and AI research. This produces a lower immediate yield, but competitive advantages compound, especially if its AI investments pay off. Source: Microsoft Investor Relations, SEC 10-Q.

Cash Yield Red Flags and Pitfalls

A high cash yield can be tempting, but it's not a guarantee of value. Watch for these warning signs:

• Declining FCF: If free cash flow shrinks year-over-year, the high yield may be unsustainable. Check 3-5 years of quarterly reports (10-Q filings on SEC Edgar).
• High debt burden: A company with massive debt obligations spends cash on interest. Look at Debt-to-EBITDA ratios; above 3.0 is concerning.
• Unsustainable dividends: Sometimes companies pay dividends exceeding free cash flow. This is a dividend trap; the payout will be cut.
• Capital-intensive industries: Utilities and manufacturers require heavy reinvestment. A 6% cash yield in utilities is normal; in software, it's a red flag.
• Cyclical businesses: Coal companies show 10% yields in booms but go negative in downturns. Always check historical trends.

Cash Yield vs. Other Metrics

Cash yield is one tool among several valuation metrics. Understanding how it compares to other common ratios helps you build a complete picture of a company's value and performance.

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Key takeaways from the comparison:

• Cash yield vs. dividend yield: Dividend yield only captures cash returned to shareholders. Cash yield includes all cash the business produces, even if reinvested for growth. High cash yield with low dividend yield signals reinvestment opportunity.
• Cash yield vs. earnings yield: Earnings yield uses accounting profits (manipulable through depreciation, revenue recognition). Cash yield uses actual cash flow (harder to fake). Cash yield is more conservative and reliable for value investors.
• Cash yield vs. P/E ratio: P/E is widely used but relies on accounting earnings. Cash yield focuses on real dollars. A stock can have a great P/E but poor cash generation if earnings quality is weak.

How to Get Started: Step-by-Step

1. Find market capitalization: Multiply current stock price by shares outstanding (available on Yahoo Finance, Bloomberg, or your broker).
2. Locate free cash flow: Visit investor relations or SEC Edgar. Open the latest 10-Q (quarterly) or 10-K (annual). Find 'Cash flows from operating activities' minus 'Capital expenditures.' Multiply quarterly FCF by 4 for annualized estimate, or use trailing twelve-month totals.
3. Calculate cash yield: (Trailing 12-month FCF / Market Cap) × 100 = Cash Yield %.
4. Compare: Is it higher than 10-year US Treasury (~4.2% early 2026)? Higher than S&P 500 average (~5-6%)? Is FCF growing? Debt manageable?
5. Decide: Buy, pass, or watch for a better entry point.

Frequently Asked Questions