Learn the basics of investment yield, definition of yield, and how to calculate the percentage yield formula for bonds and stock dividends.
CONCEPTS
Use this video lesson on the topic to discuss the financial terminology and basic economic and related concepts of
- Yield
- Investment Return
- Bonds
- Stocks
PROCEDURE
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about what things they and their family may do to prepare for a recession. Review the questions on the worksheet.
GRADE LEVEL
9-12th grades. Adult Education.
TIME REQUIRED
45 minutes
What is Yield?
Yield refers to the amount of income that an investment generates over time. It is calculated by adding interest or dividends to the investment and then dividing it by the investment’s value. It is usually expressed in an annual percentage and does not include capital gains.
However, it is important not to confuse yield and return. The return on investment, or ROI, is usually referred to as profit and loss, and that is not the same as yield. There are a few different contexts where yield can be used. It is possible to define yield in a more precise way if a qualifier is added to it, such as current yield, dividend yield, or yield until maturity. Common investments used for calculating yield are stocks, bonds, and real estate.
So how do we calculate Yield? Simply put, the percent yield formula calculates the annual income-only return of an investment by putting income in the numerator, and cost (or market price) in the denominator.
Yield = Annual Income/Investment Value
We then use this formula doing the following steps to calculate yield:
- Calculate the initial investment or market value of the stock or bond.
- Calculate the amount of income from the investment.
- Divide the market value by your income.
- Multiply this number by 100.
Bonds have an interest yield
Bond investors receive income in the form coupon payments. These can vary in frequency, but are usually semi-annual. Bonds may make things more difficult because there are many ways to calculate bond yield. This depends on factors like how long the bond is held, the coupon or interest rate and whether it is fixed or variable.
Example:
Let’s say you want to save your money and decide you wish to buy bonds. You want to buy a government bond with a coupon of 5% and it currently costs $900. What is the yield of the bond?
Answer:
5.00% x 1000 = $50.00 per year for each bond.
$50.00 / 900 = .056 x 100 = 5.56%
Dividend Yield (Stocks)
Dividends are the source of income for stockholders. Although the frequency of dividends varies, it is often quarterly. Stockholders get yields from stocks. Dividends are a form of income that is paid over a regular period. Dividends can be used to calculate yield.
Let’s take a look at the percent yield formula for dividend-paying stocks by using an example.
Example:
You want to buy a stock that is priced at $100. The quarterly dividend is $1.00 per share. What is the current dividend yield?
Answer:
$1.00 x 4 = $4.00 annual dividend
$4.00 / $100 = 0.04
.04 x 100 = 4.0 %
The current dividend yield is 4%.
It’s not difficult to calculate the yield of an investment’s value with some basic math. Learn to calculate yield so you can understand the income you get from your investments.
LESSON WORKSHEET
