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Earnings Yield

Definition

Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio.

What is 'Earnings Yield'

Earnings yield are 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.

Explaining '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.

Earnings Yield vs. P/E Ratio

Earnings yield as an investment evaluation metric is not as widely used as its P/E ratio inverse in stock valuation. Earnings yield can be useful when concerned about the rate of return on an investment. For equity investors, however, earning periodic investment income may be secondary to growing their investments' values over time. This is a why investors may refer to value-based investment metrics such as P/E ratio more often than earnings yield when making stock investments.

Earnings Yield and Return Metric

For investors looking to invest in stocks with stable dividend income, earnings yield can offer a direct look into the level of return such dividend stocks may generate. In this case, earnings yield is more of a return metric about how much an investment can earn back for investors, rather than a valuation metric about how much the investment is valued in the market by investors. However, a valuation metric such as P/E ratio can affect a return metric like earnings yield. An overvalued investment can lower earnings yield and conversely, an undervalued investment can raise earnings yield.

Earnings Yield and Valuation Metric

The inverse relationship between earnings yield and P/E ratio seem to indicate that the more valuable an investment is, the lower the earnings yield may be, and the less valuable an investment is, the higher the earnings yield may be. In reality, however, investments with strong valuations and high P/E ratios might generate more earnings over time and eventually boost up their earnings yield. On the other hand, investments with weak valuations and low P/E ratios might generate less earnings over time and, in the end, drag down their earnings yield.


Further Reading


The relationship between earnings' yield, market value and return for NYSE common stocks: Further evidence
www.sciencedirect.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

The predictive ability of the bond-stock earnings yield differential modelThe predictive ability of the bond-stock earnings yield differential model
jpm.pm-research.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

The relationship between earnings yield and market value: Evidence from the American Stock ExchangeThe relationship between earnings yield and market value: Evidence from the American Stock Exchange
onlinelibrary.wiley.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

The adjusted earnings yieldThe adjusted earnings yield
www.tandfonline.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

Aggregate earnings, firm-level earnings, and expected stock returnsAggregate earnings, firm-level earnings, and expected stock returns
www.jstor.org [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

Price-earnings ratios, dividend yields and real estate stock pricesPrice-earnings ratios, dividend yields and real estate stock prices
www.aresjournals.org [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

Some historical perspectives on the Bond-Stock Earnings Yield Model for crash prediction around the worldSome historical perspectives on the Bond-Stock Earnings Yield Model for crash prediction around the world
www.sciencedirect.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …

An international analysis of earnings, stock prices and bond yieldsAn international analysis of earnings, stock prices and bond yields
onlinelibrary.wiley.com [PDF]
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low …



Q&A About Earnings Yield


What does a high PE ratio indicate?

A high PE ratio indicates that investors are willing to pay more for each dollar of earnings.

What is the earnings yield?

The earnings yield is the earnings per share for the most recent 12-month period divided by the current market price per share.

Are there different types of earnigns yiel ds ?

Yes , there are different types of earnigns yiel ds .

Is there any relationship between valuations and returns ?

There seems to be some inverse relationship between valuations and returns but in reality , strong valuations do not necessarily mean low returns .

What do these different types show ?

Different earnigns yiel ds show changes in stock prices based on their values or changes in stock

How does an overvalued investment affect your earnings yields returns and conversely, how does undervalued investment affect your returns?

An overvalued investment lowers your earnings yields while an undervalued investment raises your earnings yields .

How can you use earning yield as a valuation metric?

Earnings yield can be used as a valuation metric when comparing it to other metrics such as PE ratios.

Why would an investor be concerned about rate of return on an investment?

Investors may be concerned about rate of return because they want to grow their investments over time.

Can you use earning yield as a return metric?

Yes, you can use earning yield as a return metric if you are looking at dividend stocks with stable dividends. In this case, earning yields offers direct insight into how much income these stocks will generate for investors. If there is no growth in value, then there will not be any increase in income from these stocks either.

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