Running Yield

Published Sep 8, 2024

Definition of Running Yield

Running yield, also known as current yield, is a financial term used to describe the annual income (interest or dividends) from an investment, expressed as a percentage of the current market price. This measure helps investors understand the income-generating ability of an investment relative to its market value, providing a snapshot of potential earnings without considering capital gains or losses.

Example

Consider an investor who buys a corporate bond for $1,000 with a fixed annual coupon payment of $50. If the current market price of the bond drops to $900, the running yield can be calculated as follows:

• Coupon Payment: $50
• Current Market Price: $900

Using the formula for running yield:

1. Running Yield = (Annual Income / Current Market Price) * 100
2. Running Yield = ($50 / $900) * 100
3. Running Yield ≈ 5.56%

In this example, the bond’s running yield is approximately 5.56%. This indicates that the investor earns 5.56% of the bond’s current market price as annual income.

Why Running Yield Matters

Running yield is an essential metric for investors, particularly those seeking income from their investments, such as retirees or income-focused investors. Here’s why it matters:

• Income Focus: Running yield allows investors to compare the income-generating potential of different investments, such as bonds or dividend-paying stocks, based on their current prices.
• Market Sensitivity: Since it’s based on current market prices, running yield provides a real-time perspective of an investment’s income relative to its market value, helping investors make informed decisions in volatile markets.
• Budgeting: For those who rely on investment income to cover living expenses, understanding the running yield helps in budgeting and financial planning.

Frequently Asked Questions (FAQ)

How does running yield differ from yield to maturity (YTM) for bonds?

Running yield only considers the current income (interest or dividends relative to the current market price) and ignores capital gains or losses. Yield to maturity (YTM), on the other hand, provides a more comprehensive measure for bonds by factoring in all future coupon payments, the difference between the purchase price and the par value, and the remaining time to maturity. While running yield offers a snapshot of income potential, YTM offers a long-term perspective on a bond’s return if held to maturity.

Is running yield relevant for all types of investments?

Running yield is particularly relevant for income-generating investments such as bonds and dividend-paying stocks. However, it is less relevant for growth-oriented investments where capital appreciation is the primary focus. For example, growth stocks may not pay significant dividends, so an investor might rely more on metrics like price-to-earnings ratio to assess potential returns.

Can running yield change over time, and what factors contribute to its fluctuation?

Yes, running yield can change over time due to fluctuations in the market price of the investment and changes in the annual income generated. Factors influencing these changes include:

• Market Conditions: Fluctuations in supply and demand, interest rate changes, and economic events can affect the market price, altering the running yield.
• Income Adjustments: Changes in dividend payments (for stocks) or coupon payments (for bonds) will affect the running yield. For instance, a company might increase or cut its dividend based on its financial performance and strategic decisions.

How can investors use running yield in their investment strategy?

Investors can use running yield to:

• Assess Income Potential: Compare different income-generating investments to find the best options aligned with their income needs and risk tolerance.
• Monitor Portfolio Performance: Keep track of the running yield of individual investments and the entire portfolio to ensure it meets income objectives.
• Identify Value: Recognize potentially undervalued investments with higher running yields, which may indicate favorable buying opportunities.

By understanding running yield, investors can make more informed decisions, balancing income generation with other investment goals.