What does the yield of a stock tell you?

Question

What does the yield in general tell you about loans, stocks, bonds etc.?

Answer 1

A stock's yield tells me something about the prospects. A company that issues a dividend does it for a variety of reasons. One of which is to share the profits directly with its owners, the stockholders. Another is to entice people to own that stock, which helps build the market value of the stock and make it valuable for public relations or debt purposes, as in they can impress potential partners or potential creditors.

Now if a company pays a lower dividend, it is usually because they are making less money, or are finding better places to put that money to work than to dole it out to stockholders. One side of that statement is bad, the other good.

Finally, if the yield has changed, we need to see which of these or other related dynamics is at play. Same dividend but higher yield? The stock price has fallen--so what caused it to fall might cause it to continue to fall, which usually is something about earnings or business prospects. A rising yield of that sort is not good news. Actually, a falling yield is good news, assuming a constant dividend. That means that the principle, the stock value, has risen.

You ferret out the reasons for the yield, or any changes in the yield, and that tells you whether to buy or run.

Answer 2

Short answer - the money you get back from an investment on an annualized basis.

Stocks - some pay a dividend, usually quarterly. Example - Exxon Mobile pays a $1.40 per share a year, in four quarterly payments of $0.35 each. Fridays close was $92 and change, so the yield is about 1.5%

Bonds - They have an interest rate, sometimes called the coupon rate, that pays twice per year. The rate is based on the face value of the bond, typically $1000.00. So if the coupon is 5%, you get $25.00 twice a year. However, if the current market value of the bond is different than $1000.00, the published yield will be based on that price. For example (this is extreme) if the current market value of the bond is $800.00, the published yield would be 6.25% (50.00/800.00).

Loans - Just another word for bonds.

What does yield tell you? Lots of things, mostly gobbledygook. If a bond's yield is higher than the coupon rate, that generally means that interest rates have gone up since the bond was issued. The market value of the bond has gone down. Stocks, mostly nothing at all; but, when I buy a stock with a (for example) 1.5% yield, that means I'm going to get a 1.5% return on my investment as long as I hold the stock (assuming the dividend remains constant). I may sell the stock for a gain or a loss, but until I do, I get that yield.

If you buy an investment with a yield, view it as putting your money in a savings account with an interest rate equal to the yield. The difference is that your money in a savings account is fairly safe. Your money in an investment is not. The market value of the investment could increase (capital gain) or decrease (capital loss).

It's your turn. Roll the dice!

Answer 3

Yield is a measure of risk for stocks and bonds. In general the higher the yield the higher the risk.

Answer 4

It tells you how much income you get in relation to the price of the particular financial instrument. So if you paid $100 000 for an investment and it brought you in $8000 per annum, you would be getting an 8% yield.