Earnings Yield

AAA

DEFINITION of 'Earnings Yield'

The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company.

The earnings yield is used by many investment managers to determine optimal asset allocations.

INVESTOPEDIA EXPLAINS 'Earnings Yield'

Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may considered undervalued relative to bonds.

Economic theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk-free rates (such as T-bills) in their earnings yield to compensate them for the higher risk of owning stocks over bonds and other asset classes.

RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Bond Equity Earnings Yield Ratio ...

    A metric used to evaluate the relationship between bond yields ...
  3. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
  4. Fed Model

    A model thought to be used by the Federal Reserve that hypothesizes ...
  5. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an ...
Related Articles
  1. Projected Returns: Honing The Craft
    Retirement

    Projected Returns: Honing The Craft

  2. Breaking Down The Fed Model
    Bonds & Fixed Income

    Breaking Down The Fed Model

  3. How To Evaluate The Quality Of EPS
    Markets

    How To Evaluate The Quality Of EPS

  4. The P/E Ratio: A Good Market-Timing ...
    Budgeting

    The P/E Ratio: A Good Market-Timing ...

comments powered by Disqus
Hot Definitions
  1. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously originated. The first position lien has an ...
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  3. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  4. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  5. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center