Yield

Yield is a measure of the income generated by an investment, typically expressed as an annual percentage of the investment's cost or current market value. Yield is most commonly associated with bonds and dividend-paying stocks, but can apply to any income-producing investment. For stocks, dividend yield is calculated by dividing the annual dividend payment by the current stock price. For example, a stock trading at $50 that pays $2 in annual dividends has a 4% dividend yield. Dividend yield changes as stock prices fluctuate - when the stock price falls, the yield rises, and vice versa. For bonds, yield calculations are more complex. The coupon yield is the annual interest payment divided by the face value. The current yield is the annual interest divided by the current market price. Yield to maturity (YTM) is the most comprehensive measure, accounting for the total return if the bond is held until maturity, including both interest payments and any price gain or loss. Yield is important for income-focused investors, particularly retirees who need regular cash flow from their investments. Higher yields provide more income but often come with higher risk. Junk bonds yield more than Treasury bonds because they're more likely to default. High dividend yields can signal a company in trouble whose stock price has fallen. The relationship between yield and price is inverse for fixed-income investments. When interest rates rise, bond prices fall, causing yields to rise. This interest rate risk is a key consideration for bond investors. Understanding yield helps investors compare income-generating investments and assess whether the income justifies the risks. Yield-focused investing involves building portfolios around income generation rather than capital appreciation. This approach suits investors who need regular cash flow, though it's important to consider total return (income plus price changes) when evaluating investment performance.