When evaluating whether a stock is attractively priced, most investors reach for the P/E ratio. But there is an equally useful metric that works in the opposite direction and makes comparison to other asset classes much easier.
That metric is earnings yield.
What Is Earnings Yield?
Earnings yield is the percentage of each dollar invested in a stock that is represented by the company's earnings. It tells you how much a company earns relative to its share price, expressed as a percentage rather than a multiple.
It is essentially the inverse of the P/E ratio. Where the P/E ratio tells you how many dollars you are paying per dollar of earnings, earnings yield tells you how many cents of earnings you receive for every dollar invested.
For example:
- A stock with a P/E ratio of 20 has an earnings yield of 5%.
- A stock with a P/E ratio of 10 has an earnings yield of 10%.
The higher the earnings yield, the more earnings you are getting per dollar of price paid. This makes it useful not just for evaluating individual stocks but for comparing equities to other asset classes like bonds.
How to Calculate Earnings Yield
The earnings yield formula is straightforward:
Earnings Yield = (Earnings Per Share ÷ Share Price) × 100
Alternatively, since earnings yield is the inverse of the P/E ratio:
Earnings Yield = (1 ÷ P/E Ratio) × 100
For example:
- A company has earnings per share (EPS) of $4.
- The current share price is $80.
- Earnings yield = ($4 ÷ $80) × 100 = 5%
Using the P/E inverse method:
- P/E ratio = $80 ÷ $4 = 20
- Earnings yield = (1 ÷ 20) × 100 = 5%
Both methods produce the same result. The choice depends on which data is more readily available to you at the time of analysis.
Earnings Yield vs P/E Ratio
Earnings yield and the P/E ratio are two sides of the same coin. They use identical inputs but present the information differently.
| Earnings Yield | P/E Ratio | |
|---|---|---|
| Formula | EPS ÷ Price × 100 | Price ÷ EPS |
| Format | Percentage | Multiple |
| Higher value means | More earnings per dollar invested | More expensive stock |
| Best used for | Cross-asset comparisons | Stock-to-stock comparisons |
The P/E ratio is more intuitive for comparing stocks within the same sector. Earnings yield is more useful when you want to compare a stock's return potential directly against something like a government bond yield or a savings rate.
Expressing the relationship as a percentage makes cross-asset comparison far more practical. This is the primary reason earnings yield exists as a separate concept.
Comparing Earnings Yield to Bond Yields
One of the most powerful uses of earnings yield is the comparison against bond yields, particularly government bond yields such as the US 10-year Treasury yield.
This comparison is sometimes called the Fed Model, a framework used to assess whether equities are cheap or expensive relative to fixed income.
The logic is straightforward:
- If the earnings yield on stocks is significantly higher than the yield on government bonds, equities may offer better value relative to the risk-free rate.
- If bond yields rise above or close to the earnings yield on stocks, the case for holding equities weakens because investors can earn a comparable return with significantly less risk.
For example:
- The S&P 500 has an earnings yield of 5%.
- The US 10-year Treasury yield is 2%.
- The equity risk premium, meaning the extra return stocks offer over bonds, is 3%.
In this scenario, stocks appear more attractive relative to bonds. Now consider a shift:
- The S&P 500 earnings yield remains at 5%.
- The 10-year Treasury yield rises to 5%.
- The equity risk premium shrinks to 0%.
Suddenly, bonds offer a comparable return with far less volatility, which changes the calculus for many investors.
This comparison is why earnings yield vs bond yield analysis becomes particularly relevant during periods of rising interest rates. As bond yields rise, the relative attractiveness of equities diminishes unless earnings yields also increase, which typically requires either higher earnings or lower stock prices.
When Earnings Yield Signals Opportunity
Earnings yield is most useful as a signal when viewed in context rather than in isolation.
High earnings yield relative to history
When a stock or index has an earnings yield significantly above its own historical average, it may indicate the market is pricing in excessive pessimism. If earnings remain stable, a higher yield means the stock has become cheaper relative to what it actually earns.
High earnings yield relative to bond yields
As discussed, a large gap between stock earnings yields and government bond yields has historically been associated with periods of equity outperformance. When this gap is wide, equities offer meaningfully more return per unit of price than risk-free alternatives.
Sector and individual stock screening
Earnings yield can be used as a screening tool to identify potentially undervalued stocks within a sector. When comparing companies with similar growth profiles, a higher earnings yield may indicate one is more attractively priced than another.
When earnings yield is low or negative
A very low earnings yield, corresponding to a very high P/E ratio, suggests investors are paying a significant premium for future growth. This is not always unjustified, particularly for high-growth companies, but it does mean the stock is priced for strong execution. Any shortfall in earnings growth can result in a sharp price decline. A negative earnings yield occurs when a company reports a net loss and is generally not a meaningful valuation metric.
When using the Gotrade App, you can view key stock metrics including EPS and share price data for US-listed equities, giving you the inputs needed to calculate earnings yield and compare it across your watchlist.
Conclusion
Earnings yield is a practical and versatile metric that expresses a company's earnings as a percentage of its price. The earnings yield formula is simply the inverse of the P/E ratio, but the percentage format unlocks a more powerful use case: direct comparison to bond yields and other fixed income benchmarks.
Understanding earnings yield vs bond yield helps investors assess whether equities are genuinely attractive relative to alternatives, particularly during shifting interest rate environments. Used alongside other valuation tools, earnings yield adds a useful dimension to any fundamental analysis process.
FAQ
What is earnings yield?
Earnings yield is a company's earnings per share divided by its share price, expressed as a percentage. It shows how much a company earns for every dollar invested in its stock.
How is earnings yield different from the P/E ratio?
They use the same inputs but present the result differently. The P/E ratio is a multiple; earnings yield is a percentage. Earnings yield is more useful for comparing stocks against bond yields and other asset classes.
When does a high earnings yield signal an opportunity?
A high earnings yield relative to historical averages or bond yields can indicate that a stock is attractively priced. It suggests investors are getting more earnings per dollar of price, which may represent better value.
References
- CFI, Earnings Yield, 2026.
- Wall Street Prep, Earnings Yield, 2026.
