Current yield is the annual income a bond or stock pays divided by its current market price

Current yield tells you what percentage return you are getting right now on money you would spend to buy a security today. It is different from the stated interest rate (called coupon rate on bonds) because market prices change after a security is issued. If you buy a bond for less than its face value, your current yield will be higher than the coupon rate. If you pay more, your current yield will be lower.

The formula is straightforward: divide the annual payment you receive by the price you pay, then multiply by 100 to express it as a percentage. For a bond paying $50 per year that you can buy for $1,000, the current yield is 5 percent. For the same bond trading at $800, the current yield is 6.25 percent.

Key Takeaways

  • Current yield equals annual income divided by current market price, expressed as a percentage.
  • For bonds, use the annual coupon payment (the fixed dollar amount paid each year, not the coupon rate percentage).
  • For stocks, use the annual dividend per share (the total of all dividend payments expected in the next 12 months).
  • Current yield changes every time the market price changes, even though the annual payment stays the same.
  • Current yield does not account for price gains or losses if you hold the security to maturity or sell it later.

Computing current yield for bonds

Start with the annual coupon payment in dollars, not the coupon rate percentage. A bond with a 5 percent coupon rate and $1,000 face value pays $50 per year. That $50 is what you use in the formula, regardless of what the coupon rate says.

Next, find the current market price of the bond. This is what you would actually pay to buy it today on the secondary market (the market where existing bonds trade, not the original issue). Bond prices are quoted as a percentage of face value, so a price of 95 means you pay $950 for a $1,000 bond. A price of 102 means you pay $1,020.

Divide the annual coupon payment by the current market price, then multiply by 100. If a bond pays $50 per year and trades at $950, the current yield is ($50 ÷ $950) × 100 = 5.26 percent. If the same bond trades at $1,050, the current yield is ($50 ÷ $1,050) × 100 = 4.76 percent.

Computing current yield for stocks

For stocks, use the annual dividend per share. This is the total amount the company paid (or is expected to pay) in dividends over the next 12 months. If a company pays $0.50 per share four times a year, the annual dividend is $2.00 per share. Some stocks pay no dividend, in which case the current yield is zero.

Find the current stock price—the price at which the stock is trading right now. This is the price you see quoted on a financial website or brokerage platform.

Divide the annual dividend per share by the current stock price, then multiply by 100. If a stock pays $2.00 per share annually and trades at $50, the current yield is ($2.00 ÷ $50) × 100 = 4 percent. If the stock price rises to $60, the current yield falls to ($2.00 ÷ $60) × 100 = 3.33 percent, even though the dividend payment has not changed.

Why current yield changes when price changes

The annual payment (coupon or dividend) is fixed. The market price moves up and down based on supply, demand, interest rates, and company performance. Because current yield is a ratio of a fixed number to a changing number, the yield itself changes constantly.

This is why bond prices and yields move in opposite directions. When interest rates rise, new bonds are issued with higher coupon rates. Older bonds with lower coupon rates become less attractive, so their prices fall to compensate. As the price falls, the current yield rises. When interest rates fall, the opposite happens: older bonds with higher coupon rates become more attractive, prices rise, and current yield falls.

For stocks, a rising stock price means the same dividend buys you a smaller percentage return. A falling stock price means the same dividend buys you a larger percentage return. This is why current yield is sometimes called a "trailing" measure—it reflects what you would earn if you bought at today's price, not what you will actually earn if you hold the security for years.

Current yield versus other yield measures

Yield to maturity (for bonds only) accounts for the price you pay today, the coupon payments you receive, and the face value you get back at maturity. It is more complex to calculate but gives a fuller picture of your total return if you hold the bond until it matures. Current yield ignores the maturity date and the final payment.

Total return includes both the income (coupon or dividend) and any price gain or loss. If you buy a bond at $950 and it rises to $1,000, your total return includes both the coupon payments and the $50 price gain. Current yield counts only the coupon payments.

Dividend growth rate measures how fast a company is increasing its dividend over time. Current yield measures only the yield right now. A stock with a low current yield but a rising dividend may be a different investment than a stock with a high current yield that never increases its dividend.

Common mistakes when calculating current yield

The most common error is using the coupon rate instead of the coupon payment in dollars. A 5 percent coupon rate is not the same as a 5 percent yield. The coupon rate is fixed when the bond is issued. The current yield changes with the market price.

Another mistake is using the wrong price. Make sure you are using the current market price, not the price you paid when you bought it, and not the face value. If you bought a bond at $1,000 and it now trades at $950, use $950 in the formula.

For stocks, do not confuse the most recent quarterly dividend with the annual dividend. If a company just paid $0.50 per share, multiply by four to get the annual rate ($2.00) before calculating yield. Some financial websites do this for you, but it is worth double-checking.

Finally, remember that current yield is a snapshot. It tells you what you would earn if you bought today and held for exactly one year while receiving the stated payments. It does not predict future prices, future dividends, or total return.

Frequently Asked Questions

Is current yield the same as the coupon rate on a bond?

No. The coupon rate is fixed when the bond is issued and never changes. Current yield changes every time the bond's market price changes. They are equal only when you buy the bond at its face value.

Can current yield be negative?

No. Current yield is always zero or positive because it is a payment divided by a price. Both numbers are positive. However, if you sell the security for less than you paid, your total return (including the price loss) can be negative.

Why would I care about current yield if I am buying and holding forever?

Current yield tells you the income you will receive each year relative to what you are paying today. If you hold forever, you will receive that income stream indefinitely, so knowing the current yield helps you compare this investment to other uses of your money.

Does current yield account for taxes?

No. Current yield is calculated before taxes. Bond interest and stock dividends are taxed differently depending on the type of security and your tax bracket, so you may want to calculate an after-tax yield for comparison purposes.

What is a good current yield?

That depends on interest rates, the type of security, and your goals. In a low-interest environment, a 3 percent yield might be attractive. In a high-interest environment, it might be low. Compare the current yield of a security to other similar securities and to current interest rates on savings accounts or money market funds.