Dividend and interest yield
The share of an investment's value paid out each year as cash: dividends from stocks, or interest from bonds, savings and money market funds.
Yearly payout = Value × yield ; Price growth ≈ Total return − yield
Explanation
Investments reward you in two ways: the price can rise, and the investment can pay you cash. Stocks pay dividends, bonds pay interest (often called coupons), and savings accounts and money market funds pay interest. Yield is that yearly cash payout as a percentage of what the investment is worth.
Yield is part of total return, not added on top. In the app, an asset’s return setting is its total return. The yield setting says how much of that return comes as dividends or interest instead of price growth. If stocks return 7% in total and yield 1.5%, about 5.5% comes from rising prices. Changing the yield does not change how much you earn before tax. It changes when the tax is due.
Why it matters for taxes:
- Taxable accounts: yield is taxed every year, even if you reinvest it. Qualified stock dividends are taxed at the long-term capital gains rates of 0%, 15% or 20%. Bond and cash interest is taxed as ordinary income, at your full bracket rate. Price growth is not taxed until you sell.
- 401(k), IRA, Roth IRA and HSA: yield is not taxed year by year, so it makes no difference to this year’s taxes.
This is why many people hold bonds and cash in tax-advantaged accounts and stocks in taxable ones.
Typical yields (approximate, and they change over time):
- Broad US stock funds: about 1% to 2%
- Bond funds: about 3% to 5%
- Cash, savings and money market: close to current short-term interest rates
In scenarios, dividends and interest earned in a taxable account are added to that year’s taxable income and then reinvested. The reinvested amount raises your cost basis, so you are not taxed on it again when you sell.
Example
Three holdings in a taxable account:
- Bonds: $100,000 at a 4% yield pays $100,000 × 0.04 = $4,000 of interest a year. In the 22% bracket, that is $880 of tax.
- High-yield savings or money market: $50,000 at 4% pays $50,000 × 0.04 = $2,000 of interest, taxed as ordinary income. At 22%, that is $440.
- Stocks: $200,000 at a 1.5% yield pays $200,000 × 0.015 = $3,000 of qualified dividends. At the 15% rate, that is $450.
All three payouts are reinvested, so your cost basis rises by $9,000. Held inside an IRA instead, the same $9,000 would create no tax this year.