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Income Yield – Definition, Overview & FAQ

What is an income yield?

Definition: Income yield is a financial metric that measures the income generated from an investment relative to the investment’s cost or current market value.

It’s used to assess the profitability of income-producing assets like stocks, bonds, and real estate.

Calculating the income yield

Income yield is calculated by dividing the annual income (such as dividends for stocks or rent for real estate) by the investment’s cost or current market value. The result is then expressed as a percentage.

First, you need to identify the total income generated by the investment in a year. For instance, in the case of a rental property, this would be the total rent collected over a year. For stocks, it would be the total annual dividend payments.

Then, identify the investment cost or current market value. This is the amount initially paid for the investment or its current market value. For a rental property, this could be the purchase price or its current market value. For stocks, it would be the current market price per share.

Divide the annual income by the investment cost or market value.

Multiply the result by 100 to express the income yield as a percentage.

The formula can be expressed as:

Income Yield = ( Annual Income / Investment Cost or Market Value) × 100 %

For example, if a rental property was purchased for £200,000 and generates £10,000 in annual rent, the income yield would be calculated as follows:

Income Yield = ( 10,000 / 200,000) × 100% = 5%

Use in real estate

In real estate, income yield is often referred to as the rental yield. It measures how much cash an income-generating property produces each year as a percentage of the property’s value.

Investors use rental yield to compare the potential return on different properties. It helps in identifying which properties might offer better income returns on the investment.

Tracking rental yields across different regions or property types can provide insights into market trends and help investors make informed decisions based on potential income generation.

A high rental yield can attract investors focused on short-term income generation. Conversely, a lower yield might be acceptable in areas with a high potential for capital appreciation.

For more information on income yield in real estate, check our glossary on rental yield.

Use in stocks

For stocks, the income yield is typically based on dividend payments. It’s calculated by dividing the annual dividends per share by the stock’s current price per share.

Use in real estate In real estate, income yield is often referred to as the rental yield. It measures how much cash an income-generating property produces each year as a percentage of the property’s value.

Use in bonds

For bonds, the yield is the annual interest payments divided by the bond’s current price. It indicates the return you can expect from the bond based on its current price.

Rate of return vs. yield

The rate of return is a measure of the profitability of an investment over a specified period. It accounts for all gains and losses and any income generated, such as dividends or interest. It’s particularly useful for comparing the performance of different investments over the same time frame.

It is calculated as the percentage change in the value of the investment over the period, considering both capital gains (or losses) and income. The formula is:

(End Value − Beginning Value + Income ) / Beginning Value × 100%

Yield primarily refers to the income generated by an investment, relative to its cost or current market value. It does not typically include capital gains or losses in its calculation.

Yield is used to assess the income-generating efficiency of an investment and is particularly important for investments where ongoing income is a significant factor, such as bonds or dividend-paying stocks.


  •  Rate of return considers total gains and income, reflecting both the income and the capital appreciation, while yield focuses only on the income aspect.
  •  Rate of return is usually calculated over a specific period and can change based on the length of that period. Yield is often based on annual income and can be a more static measure.
  • Rate of return is more comprehensive and is preferred for overall investment performance evaluation. Yield is favored for assessing and comparing the income-producing potential of various investments.

Yield vs. income yield

Yield and income yield are terms often used interchangeably in investment contexts, but there can be subtle differences in their usage depending on the specific type of investment being considered:

In its broadest sense, yield refers to the earnings generated from an investment, typically expressed as a percentage of the investment’s cost or current market value.

Yield can take various forms depending on the type of investment. For example, in bonds, it refers to the interest earned relative to the bond’s price; in stocks, it often refers to the dividend yield; and in real estate, it’s about the rental income relative to the property’s value.

The exact meaning of yield can vary based on the asset class. It’s a measure of the return on investment focusing mainly on the income component.

Income yield typically refers specifically to the income generated from an investment as a percentage of its cost or market value. It is a clear indicator of the income-producing ability of the investment.

The term ‘income yield’ is often used to emphasize the ongoing income (like rent, dividends, or interest payments) an investment generates, as distinct from potential capital gains.

In real estate investment, income yield is often synonymous with rental yield, indicating the annual rental income as a percentage of the property’s purchase price or market value.


‘Income yield’ might be used to specifically emphasize or clarify that the focus is on the income aspect of the return, as opposed to ‘yield’ which can sometimes be understood to include or imply other forms of return as well.

Importance of income yield

Income yield is a key metric for income generation. It helps compare the income-producing potential of different investments and make informed decisions based on their income needs and investment goals.

For ongoing investments, tracking changes in income yield over time can provide insights into their performance and sustainability, indicating when to hold, sell, or buy more.

Income yield analysis assists in portfolio diversification. Investments with stable and high yields can be balanced with growth-oriented investments, reducing overall portfolio risk.

For individual investors, knowing the expected income yield helps in budgeting and managing cash flow, especially when relying on investment income to cover expenses.


How do you calculate income yield?

Calculate income yield by dividing the annual income generated from the investment (like rent from property or dividends from stocks) by the investment’s purchase price or current market value, and then multiply by 100 to get a percentage.

Can income yield change over time?

Yes, income yield can change if the income generated by the investment or its market value fluctuates. For instance, rent increases or property value appreciation can affect the yield.

Is a higher income yield always better?

While a higher income yield may indicate more income generation relative to the investment’s value, it can also signal higher risk. Investors should balance income yield with other factors like growth potential and risk level.

How does income yield differ from capital growth?

Income yield refers to the earnings from an investment, like rent or dividends, whereas capital growth pertains to the increase in the investment’s value over time.

Does income yield include expenses?

No, income yield is calculated using gross income. It doesn’t account for operating expenses or other costs associated with the investment.

What is a good income yield?

A “good” income yield varies by market and investment type. For example, in real estate, a yield of 4-6% might be considered good in many markets, but this can vary regionally and with market conditions.

Are there tax implications for income yield?

Yes, income generated from investments, like rental income or dividends, is typically subject to taxation. The tax implications depend on the investment type and the investor’s personal tax situation.