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BREAKING DOWN ‘Yield’
The yield of an investment is tied to the risk associated with the aforementioned investment. The higher the risk is considered to be, the higher the associated yield potential. Except in the most secure investments, such as zero coupon bonds, a yield is not a guarantee. Instead, the listed yield is functionally an estimate of the future performance of the investment. Generally, the risks associated with stocks are considered higher than those associated with bonds. This can lead stocks to have a higher yield potential when compared to many bonds currently on the market.
In regards to a stock, there are two stock dividend yields. If you buy a stock for $30 (cost basis) and its current price and annual dividend are $33 and $1, respectively, the cost yield will be 3.3% ($1/$30) and the current yield will be 3% ($1/$33).
Bonds have multiple yield options depending on the exact nature of the investment. The coupon is the bond interest rate fixed at issuance. The current yield is the bond interest rate as a percentage of the current price of the bond. The yield to maturity is an estimate of what an investor will receive if the bond is held to its maturity date. Non-taxable municipal bonds will also have a tax-equivalent (TE) yield determined by the investor’s tax bracket .
Mutual Fund Yields
Mutual funds have two primary forms of yields for consideration. The dividend yields are expressed as an annual percentage measure of the income that was earned by the fund’s portfolio. The associated income is derived from the dividends and interest generated by the included investments. Additionally, dividend yields are based on the net income received after the fund’s associated expenses have been paid, or at a minimum, accounted for.
The SEC yield is based on the yields reported by particular companies as required by the Securities and Exchange Commission (SEC) and is based on an assumption that all associated securities are held until maturity. Additionally, the assumption exists that all income generated is reinvested. Like dividend yields, SEC yields also account for the presence of required fees associated with the fund, and allocates funds to them accordingly before determining the actual yield.