UK Accounting Glossary
The annual income earned from an investment usually expressed as a percentage of the money invested.
In general, the yield is a term that defines a return on a capital investment of various forms. Typically, the yield is expressed as a percentage and is used as an annual figure. An example of yield would be an investment in real estate or a business deal that generates a ten per cent return. It is then said that that investment yielded a ten per cent return.
In the stock market yield essentially communicates a rate of return made form an investment in common and preferred stocks. This particular yield comes in the form of a dividend and is also called dividend yield. Yield is also a function of the bond market. One of its applications is current yield, which is a coupon rate of interest divided by the bond’s purchase price. Additionally, yield is a rate of return on a bond that takes into account the sum annual interest payment, the purchase price, the redemption value, as well as the time period remaining until maturity. This is also referred to as maturity yield or yield to maturity.
To calculate the yield on a share, take the dividend paid (this will be net of the basic rate of tax), add back the tax to get the gross yield and then divide by the share price and multiply by 100. In simple terms, if you buy shares in (say) General Trading Company and the gross dividend is 5 pence and the shares are 100 pence, your yield is 5%.
Yield can be an important consideration when investing. Some companies have a policy of maximising their dividend payouts, others are more concerned to retain all or most of the profits for re-investment.
In the case of fixed interest stock, such as gilts, the return is a specified rate of interest. But there may also be a capital gain or loss to take into account if the investor holds the stock until maturity when it is redeemed by the issuer at face value. This is why it’s important to consider two gilt yield figures, the interest yield and the redemption yield.
Annual percentage yield is effectively an annual rate of return that takes into account the impact made by compounding interest. It is calculated with the help of the following formula:
Annual percentage yield = (1 + periodic rate) # periods -1
Current yield may be explained in economic terms as a result of the division of yearly income by the present price of a particular security. In the case of stocks, the current yield is also referred to as dividend yield and bond yield. It is computed by using the following formula:
The dividend yield is a financial ratio. It basically provides details of payments made by business establishments in terms of prices of shares issued by themselves. In case there is no capital gain, the dividend yield is regarded as a return on investment for a share. Following is an equational representation of dividend yield:
Dividend yield = yearly dividends per share/price of each share
Higher-rate deposit accounts tend to yield good returns.
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This glossary post was last updated: 26th December 2018.