What is Earnings Yield?
Earnings yield is the inverse of the P/E ratio: it expresses earnings as a percentage of the stock price, making it directly comparable to bond yields. This allows investors to evaluate whether stocks are cheap or expensive relative to fixed income. A stock with a P/E of 20 has an earnings yield of 5%; if the 10-year Treasury yields 4.5%, the equity risk premium is only 0.5%, thin compensation for taking equity risk. When earnings yield significantly exceeds bond yields, equities are generally considered attractive. The Fed Model uses this comparison as a market valuation tool, though it has well-documented limitations.
Formula
Earnings Yield = EPS / Price per Share
Earnings Yield = 1 / P/E Ratio
Result expressed as a percentage (multiply by 100)
Calculator
How to Use
- 1Get EPS and price: Use TTM diluted EPS and current market price, or use 1 / P/E.
- 2Divide EPS by price: Multiply by 100 to express as a percentage.
- 3Compare to bond yields: The spread between earnings yield and the 10-year Treasury yield is the equity risk premium (ERP).
- 4Interpret: Higher earnings yield → cheaper equities relative to bonds. A positive ERP of 2-4% is historically normal.
Worked Example
Example: Comparing stock to bonds
Price
$100
EPS
$6
10yr Treasury
4.5%
Earnings Yield = 6 / 100 = 6.0%. ERP = 6.0% - 4.5% = 1.5%. The stock offers a 1.5 percentage point premium over risk-free bonds, which is on the thinner side historically. A wider spread would suggest stocks are more attractive relative to bonds.
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Figures from the most recent annual filing (10-K / 20-F), sourced directly from SEC EDGAR.