UK Accounting Glossary
The annual income provided by an investment.
The annual income earned from an investment usually expressed as a percentage of the money invested.
Yield is the annual return you receive from holding a stock, share or unit trust – it is expressed as a percentage of its price.
In general, 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 a 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.
In the case of shares, the yield is calculated by expressing the dividend as a percentage of the cost of the investment.
To calculate 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.
Higher-rate deposit accounts tend to yield good returns.
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This glossary post was last updated: 26th December 2018.