Earnings yield

The earnings yield is a firm’s earnings per share for the most recent 12 months divided by the share price – effectively the opposite of the p/e ratio. The result is expressed as a percentage and represents the percentage return or yield an investor would receive if all the firm’s earnings were to be paid out in dividends.

Looking at the earnings yield rather than the dividend yield as a measure of returns tends to be more popular during periods when dividend payouts are low. The idea is that retained earnings, once re-invested, generate additional earnings, increasing the likelihood and size of future dividends. Hence even undistributed earnings are considered to provide a return, or yield.

 

• See Tim Bennett’s video tutorial: Beginner’s guide to investing: earnings per share.

Merryn

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