Interest rates are so low these days that you need a magnifying glass to see the yield on many investments. But first, you need to know which yields to look at.
Use this guide to see which yields matter most for savings accounts, stocks and bonds — and which you can ignore.
For an interest-bearing account — a savings account, CD or money market — look at the APY, or annual percentage yield, which may differ from the simple interest rate quoted by the bank or credit union. The APY estimates the interest you’ll earn over the next 12 months, taking into account the effect of compounding. “It puts things in like terms, so you can compare a CD with a daily compound rate with one that compounds weekly,” says Greg McBride, chief financial analyst at Bankrate.com.
Money market fund yields differ from yields on the money market accounts at your bank or credit union. Money funds are mutual funds that invest in short-term bonds. They report a seven-day SEC yield, a calculation set by the Securities and Exchange Commission that projects what the fund will return over the next year — after fees — based on how the fund has performed over the past seven days.
Although a seven-day yield and an APY are totally different calculations, you can still compare the two if, say, you’re trying to choose between a money market account and a money fund. “At the end of the day, an APY and a seven-day yield are both projections of what you may earn in interest over the course of a year,” says McBride.
Investors in dividend-paying stocks want to look at the forward dividend yield, which takes the most recent payout, annualizes it, then divides by the stock price to estimate your annual yield. Don’t pay much heed to the trailing 12-month (TTM) dividend yield. It’s a backward-looking ratio and won’t account for more recent cuts or hikes.
Investors in individual bonds should focus on yield to maturity. A bond’s coupon rate or current yield can tell you how much income a bond will generate, but those measures won’t signal what kind of total return the bond might deliver. A yield to maturity can, because it factors in your purchase price as well as the bond’s coupon rate and the time remaining to maturity.
Bond funds, which buy and sell bonds all the time, don’t have a yield to maturity. That’s why investors should scrutinize the fund’s SEC 30-day yield. It’s a standardized calculation that estimates the yield an investor will receive over the next 12 months based on the income generated over the past 30 days, and it accounts for fees, too.
Less helpful these days is a bond fund’s TTM yield or 12-month yield. Interest rates have fallen so sharply since early 2020 that “the income of the past 12 months is a whole lot different from the past 30 days,” says McBride.
(Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
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