Average annual yield refers to the average return (or profit) earned by an investment over the course of a year. You’ll most likely see the number depicted as a percentage.
The average annual yield can be calculated for investments like stocks, bonds, mutual funds and savings accounts, and it can be used to compare the performance of different investment options.
Here’s how to calculate it and answers to some common questions about yields and returns in investing.
Key takeaways
- An average annual return represents a given investment’s typical profit in a year.
- Yield is the percentage an investment pays, while return usually refers to the amount an investment earns over a specific period.
- Determining a “good” yield for an investment is tricky because investments like stocks and bonds often perform differently.
How to calculate average annual yield
To find the average annual yield, you need to first determine the initial investment amount. This is the initial amount of money you invested in the asset. Then determine the total return, or the amount of income you’ve earned over the time you held the asset. Next determine the holding period, which is the amount of time you held the asset.
To calculate the annual yield, you need to divide the total return by the initial investment and multiply it by 100 to get the annual yield as a percentage. Then, depending on the number of years you held the asset, divide the annual yield by that number to determine the average annual yield.
Here’s an example. Say you invested $12,000 in a bond and held that asset for five years. Over that time, you earned $4,000 in dividends and it appreciated to $18,000. Here’s how you could calculate the average annual yield:
- Determine the initial investment: In this example, the initial investment is $12,000.
- Figure out the total return: You earned $4,000 in dividends and $2,000 in capital gains, which is $6,000.
- Establish the holding period: The holding period in this example is five years.
- Calculate the annual yield: The annual yield is the total return divided by the initial investment multiplied by 100. In this example, take $6,000 and divide it by $12,000 to get 0.5. Then multiply by 100 to get 50 percent.
- Divide the annual yield by the number of holding years to find the average annual yield: In this example, take 50 percent divided by five years to get 10 percent.
- The annual average yield in this example is 10 percent.
Types of yields
Yield is a broad term, and its definition varies depending on the type of investment. For instance, stocks, bonds, mutual funds and real estate all have different yields.
Stock yield
When considering a stock yield, we generally look at the dividend payments an investor receives. Note that this is separate from the stock’s value or share price appreciation. To find the stock yield, divide the amount the stock pays in dividends by the share price.
For example, if you own a stock with a $100 share price and earned $2 in dividends, the stock yield is 2 percent.
Bond yield
Somewhat similar to a stock yield, a bond yield is how much a bond investor receives in interest payments in a year. You could use the same calculation from the previous example, in which $2 in interest provides a 2 percent return on a $100 bond. Interest is how bonds generate returns for investors.
However, bonds can be slightly more complicated because investors often buy them on the secondary market. This results in bond purchases sometimes having a price premium or a discount. For example, if you buy a bond with a face value of $100 for $105, then $2 in interest results in a 1.9 percent yield.
Mutual fund yield
Individuals who invest in mutual funds can receive returns as interest or dividends. The yield is expressed as a percentage and includes any interest and dividends received during the year. To calculate mutual fund yield, divide the total interest and dividends by the mutual fund’s share price.
Real estate yield
An individual who owns an investment property can calculate their yield by dividing the annual income from the property by its fair market value. For instance, if a property has a fair market value of $400,000 and a monthly rent of $2,500, the yield is 7.5 percent.
However, there are additional yield types to consider within real estate. For instance, the yield we just calculated is considered a gross real estate yield, which doesn’t consider any expenses. Net yield, which does consider expenses, is often a more useful calculation.
What is the difference between yield and return?
While yield and return are often used interchangeably in investing, they aren’t the same.
Yield, as described above, refers to the income earned by an investment, typically expressed as a percentage. You’ll often hear yield used when bonds or dividend stocks are discussed.
Return refers to the gain or loss of an investment over a specific amount of time. Total return encompasses the investment’s total interest, capital appreciation, distributions and dividends.
These two numbers could be different if you’re comparing a dividend-earning stock. You’d account for the increase or decrease in share price when looking at the return, but not the yield. With the latter, you’d look at the dividend income only. However, the capital gains yield looks at the price increase of an investment, without regard to other income, such as dividends.
What is a good average annualized return?
There isn’t a blanket answer to what is a good average annualized return. It depends on the investment, account and other factors. For instance, the average annual return on bonds has been historically lower than stocks or real estate. However, bonds are generally considered less risky than stocks or real estate. So what’s “good” can depend on your risk tolerance and other investing factors.
However, if you’re trying to determine whether an investment is performing well, it’s generally more useful to compare similar investments, such as large-cap stocks to other large-cap stocks in the same industries to find the industry average or typical return.
What is the average annual return on stocks?
There isn’t an overall answer to this question. In this case, it’s because every stock typically has its own average annual return — and there are thousands of public companies in the U.S., not to mention the global market.
However, there are certain benchmarks you can turn to. For instance, the S&P 500, which is an index of around 500 large, publicly traded companies, has had an average annual return of 10 percent historically.
If you’re looking for the average annual yield on the stock market, that’s typically not a number that’s calculated or used. Investors can use bond yields and dividend yields to compare investments.
Bottom line
Average annual yield is the yield an investment earns in a year, usually expressed as a percentage. You can calculate the average annual yield by dividing the total return an investment generated by the number of years you held it.
In addition to stocks, you can calculate the yield on other investments like bonds, mutual funds and real estate. While the calculations vary slightly, they show how an investment performs over a given period. This can help investors decide whether an asset or security is worthwhile.
— Bankrate contributor Bob Haegele contributed to an update of this article.
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