Yield

Yield measures the income an asset produces as a fraction of what it costs or what it is worth. A share paying 3 percent in dividends, a bond paying a 5 percent coupon on its face value, a flat producing rent worth 6 percent of its price: all three are yields, and all three describe cash arriving rather than the asset becoming more valuable. The word covers a family of measures, and the differences between them matter:

• Dividend yield is the annual dividend divided by the current share price.
• Current yield on a bond is the annual coupon divided by the market price, not the face value.
• Yield to maturity is the discount rate that makes the present value of every remaining payment equal to today's price, so it also folds in the gain or loss from holding to redemption. It is an internal rate of return under another name, and the IRR calculator computes the same quantity.

Because most yields divide a fixed payment by a moving price, price and yield move in opposite directions. A bond whose price falls carries a higher yield for the next buyer without anything about the bond itself changing, and a move of a tenth of a percentage point is 10 basis points.

The mistake is reading yield as return. Yield says nothing about the price, so a share with an unusually high dividend yield is often one whose price has dropped for a reason, and a payout that gets cut takes the yield with it. Total return is the figure that counts income and price change together, and an annualised return puts that on a yearly scale.