Earnings yield
What it is
Inverse of P/E (1/PE × 100). Represents the annualized return on earnings of a company (or the entire market) per dollar invested. If P/E is 20, earnings yield is 5% — as if buying a "perpetual bond" at 5%.
How to read it
Favorite metric for comparing equities to bonds. If earnings yield is 5% and 10Y yield is 4.5%, equities offer little risk premium. If earnings yield is 7% and 10Y is 2%, equities are attractive.
Common reference points
- Very attractive> 7%
- Attractive5 – 7%
- Neutral4 – 5%
- Less attractive vs bonds< 4%
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
Like P/E, earnings yield alone ignores growth. A company at 4% earnings yield with 15% growth is more attractive than one at 8% in decline. Combine with expected growth (PEG-like).
Other measures — Macro — valuation
Educational content. Polaris is not a registered investment adviser and makes no recommendation.