What is a good earnings yield for a stock?

A good earnings yield depends on the current risk-free rate (10-year Treasury yield). When the earnings yield of a stock is significantly above the 10-year Treasury yield, stocks are considered cheap relative to bonds. As a rule of thumb, an earnings yield above 5–6% is generally attractive for S&P 500 stocks in a normal rate environment.

How does earnings yield relate to P/E ratio?

Earnings yield is simply the inverse of P/E ratio. A P/E of 10 equals an earnings yield of 10%. A P/E of 20 equals 5%. A P/E of 25 equals 4%. When P/E ratios are high, earnings yields are low — meaning you are getting less earnings per dollar invested.

What is the Fed Model for earnings yield?

The Fed Model compares the earnings yield of the S&P 500 to the 10-year Treasury yield. When the earnings yield is higher than the Treasury yield, stocks are considered cheap relative to bonds. When the Treasury yield exceeds the earnings yield, bonds may be more attractive than stocks on a pure return basis.

Should I use trailing or forward earnings yield?

Forward earnings yield (based on next twelve months EPS estimates) is generally more useful because it reflects what investors expect to earn going forward. Trailing earnings yield uses past earnings and can be distorted by one-time events. Most analysts use forward EPS for valuation comparisons.

What Is Earnings Yield? A Plain-English Guide for Stock Investors

Q: What is earnings yield?

Earnings yield = EPS ÷ Stock Price × 100, or equivalently 1 ÷ P/E Ratio × 100. It tells you what percentage of the stock price you are getting back as earnings each year. A P/E of 20 equals an earnings yield of 5%.

Earnings yield is the percentage of a stock's price that is earned back as profits each year. It is the inverse of the P/E ratio and gives you a way to compare a stock's return to the return on bonds or other investments.

Formula: Earnings Yield = EPS ÷ Stock Price × 100 (equivalently: 1 ÷ P/E Ratio × 100). Example: a P/E of 20 equals an earnings yield of 5%.

Earnings Yield vs. P/E Ratio

Earnings yield and P/E ratio are two ways to express the same relationship — they are reciprocals of each other. The reason investors use earnings yield instead of P/E is that a percentage is easier to compare directly to bond yields and other asset classes. P/E of 10 = 10% earnings yield. P/E of 20 = 5%. P/E of 30 = 3.3%.

Comparing Stocks to Bonds: The Fed Model

The most powerful use of earnings yield is comparing it to the 10-year Treasury yield (the "Fed Model"). When the stock's earnings yield is higher than the Treasury yield, stocks look cheap relative to bonds. When the Treasury yield exceeds the earnings yield, bonds may offer better risk-adjusted returns.

Example: If the S&P 500 P/E is 20 (earnings yield = 5%) and the 10-year Treasury yields 4.5%, the equity risk premium is only 0.5% — stocks are not particularly cheap vs. bonds.

Forward vs. Trailing Earnings Yield

Forward earnings yield (using next-twelve-months EPS estimates) is generally more useful because stock prices are forward-looking. Trailing earnings yield uses actual past earnings and is more reliable but may be distorted by one-time events. Most analysts prefer forward earnings yield for valuation comparisons.

Limitations of Earnings Yield

Earnings yield is most meaningful when comparing companies in the same industry. A tech company with a 3% earnings yield might be reasonable if earnings are growing 30% annually; a utility with a 3% earnings yield is likely overvalued. Always combine earnings yield with growth analysis — the PEG ratio does exactly this. See the lowest PEG ratio rankings and lowest P/E rankings.