What Is Gross Yield?
The gross yield of an investment is its profit before taxes and expenses are deducted. Gross yield is expressed in percentage terms. It is calculated as the annual return on an investment prior to taxes and expenses, divided by the current price of the investment.
How Gross Yield Works
Gross yield is a measurement used for many investments including real estate, fixed-income investments, and mutual fund investments. But it is only one way to measure the return on an investment.
For example, a stock that pays $3 in annual dividends and is currently trading at $60 a share has a gross (dividend) yield of 5.0%. If there is a withholding tax of 10% on the dividend payments, the net dividend yield would be 4.5%.
- Gross yield is the overall return on an investment without deducting taxes and expenses.
- Gross yield may be used to compare the relative returns of various investments including bonds, mutual funds, and rental property.
- Net yield is the real return to the investor.
In the case of some investments such as rental property, the difference between gross and net yields can be significant since the income can be substantially eroded by operating expenses such as maintenance expenditures, insurance, and property taxes.
Other commonly-used measurements of yield include nominal yield, current yield, and yield to maturity.
And, mutual fund investors need to carefully watch the difference between the gross and net yields on their investments in order to be certain that fund management fees and brokerage fees, or both, are not taking a big bite out of their real returns.
Gross Yield, Bond Yields, and Mutual Fund Yields
Common bond yield terms include nominal yield, current yield, and yield to maturity.
- Nominal yield is the coupon rate on a bond divided by its par value. It is the interest rate that a bond issuer promises to pay bond purchasers. The nominal rate is fixed and applies for the entire life of the bond. It may also be called the nominal rate, coupon yield, or coupon rate.
- The current yield of a bond equals its annual earnings (or dividends) divided by its current market price. Current yield represents the return an investor would expect if the owner purchased the bond and held it for one full year.
- Yield to maturity (YTM) is slightly more complex. This is the total return that a bond is anticipated to earn if it is held until it matures. YTM is a long-term bond's yield expressed as an annual rate. It can be thought of as the internal rate of return (IRR) of a bond if the investor holds the bond until maturity and receives all payments as scheduled. Yield to maturity is also called the book yield or redemption yield.
Mutual Fund Yields
Mutual fund yields are reported in two ways:
- Dividend yields are expressed as an annual percentage of a fund’s portfolio income, also based on the net income received after the fund's associated expenses have been paid.
- The SEC yield is based on the yields reported by particular companies as required by the Securities and Exchange Commission (SEC). This is based on an assumption that all of the associated securities are held until maturity.