The average annual yield refers to the average return (or profit) earned by an investment over a year. You’ll most likely see the number depicted as a percentage.

The average annual yield can be calculated for investments like stocks, bonds, mutual funds and savings accounts, and it can be used to compare the performance of different investment options.

Here’s how to calculate it, and answers to some common questions about yields and returns in investing.

How to calculate average annual yield

To find the average annual yield, you need to first determine the initial investment amount. This is the initial amount of money you invested in the asset. Then determine the total return, or the amount of income you’ve earned over the time you held the asset. Next determine the holding period, which is the amount of time you held the asset.

To calculate the annual yield, you need to divide the total return by the initial investment and multiply it by 100 to get the annual yield as a percentage. Then depending on the number of years you held the asset, divide the annual yield by that number to determine the average annual yield.

Here’s an example. Say you invested $12,000 in a bond and held that asset for 5 years. Over that time, you earned $4,000 in dividends and it appreciated to $18,000. Here’s how you could calculate the average annual yield:

  1. Determine the initial investment: In this example, the initial investment is $12,000.
  2. Figure out the total return: You earned $4,000 in dividends and $2,000 in capital gains which is $6,000.
  3. Establish the holding period: The holding period in this example is 5 years.
  4. Calculate the annual yield: The annual yield is the total return divided by the initial investment multiplied by 100. In this example, take $6,000 and divide it by $12,000 to get 0.5. Then multiply by 100 to get 50 percent.
  5. Find the number of years you held the investment: In this example, it’s 5 years.
  6. Divide the annual yield by the number of holding years to find the average annual yield: In this example, take 50 percent divided by 5 years to get 10 percent.
  7. The annual average yield in this example is 10 percent.

Yield vs. return

While yield and return are often used interchangeably in investing, they aren’t the same.

Yield, as described above, refers to the income earned by an investment, typically expressed as a percentage. You’ll often hear yield used when bonds or dividend stocks are discussed.

Return refers to the gain or loss of an investment over a specific amount of time. Total return encompasses the investment’s total interest, capital appreciation, distributions and dividends.

These two numbers could be different if you’re comparing a dividend earning stock. You’d account for the increase or decrease in share price when looking at the return, but not the yield. With the latter, you’d look at the dividend income only. However, the capital gains yield looks at the price increase of an investment, without regard to other income, such as dividends.

What is a good average annualized return?

There isn’t a blanket answer to what is a good average annualized return. It depends on the investment, account and other factors. For instance, the average annual return on bonds has been historically lower than stocks or real estate. However, bonds are generally considered less risky than stocks or real estate. So what’s “good” can depend on your risk tolerance and other investing factors.

However, if you’re trying to determine whether an investment is performing well, it’s generally more useful to compare similar investments, such as large-cap stocks to other large-cap stocks in the same industries to find the industry average or typical return.

What is the average annual return on stocks?

There isn’t an overall answer to this question. In this case, it’s because every stock typically has its own average annual return — and there are thousands of public companies in the U.S., not to mention the global market.

However, there are certain benchmarks you can turn to. For instance, the S&P 500, which is an index of around 500 large, publicly traded companies, has had an average annual return of 10 percent historically.

If you’re looking for the average annual yield on the stock market, that’s typically not a number that’s calculated or used. Investors can use bond yields and dividend yields to compare investments.