Investors calculate yield using two primary methods. Current yield divides annual income by the current market price, providing a snapshot of today's return rate. Yield to maturity, used for bonds, accounts for all future interest payments and the difference between current price and face value at maturity. A stock trading at $100 that pays $4 in annual dividends has a current yield of 4%. If that stock's price rises to $125, the yield drops to 3.2% for new investors, though the original investor's yield on cost remains 4%.
Why It Matters
Yield serves as a critical tool for comparing income-generating investments across different asset classes and evaluating whether an investment meets income requirements. For angel investors building balanced portfolios, high-yield securities can offset the zero-income nature of early-stage equity positions. Understanding yield helps investors distinguish between investments that generate regular cash flow and those relying solely on price appreciation, a distinction that becomes essential for managing cash needs and tax planning.
Example
An angel investor places $500,000 into a diversified portfolio. She allocates $200,000 to startup equity (0% yield), $200,000 to dividend-paying blue-chip stocks yielding 3% ($6,000 annually), and $100,000 to investment-grade corporate bonds yielding 5% ($5,000 annually). Her blended portfolio yield is 2.2% ($11,000 ÷ $500,000), generating $11,000 in annual income while maintaining exposure to high-growth startups. This yield covers basic expenses while her equity positions pursue capital appreciation.