What Is a High Yield in Finance and Investing?
Understand high yield in finance and investing. Discover the nature of higher returns, the products that offer them, and their inherent qualities.
“High yield” in finance and investing refers to financial products that offer a return significantly above average market rates.
Understanding High Yield
Yield, in financial terms, represents the income return on an investment, typically expressed as an annual percentage. For instance, a bond’s yield might be its annual interest payment divided by its current market price. What makes a yield “high” is a relative concept, as there is no fixed percentage that universally defines it. Instead, it is determined by comparing an investment’s return against established benchmarks, prevailing interest rates, or similar investment products.
High yield is a comparative measure; an investment’s return is considered high if it surpasses comparable assets or the general market. For example, a savings account offering 4.00% APY would be considered high-yield when the national average for traditional savings accounts is around 0.38% APY. This comparison applies across various asset classes, focusing on the income generated relative to the capital invested.
Types of High-Yield Financial Products
Several financial products are known for their potential to offer high yields, each with distinct mechanisms for generating returns.
High-yield savings accounts are deposit accounts offered by banks that provide interest rates considerably higher than traditional savings accounts. For example, while the national average for savings accounts was approximately 0.38% APY as of July 2025, some high-yield accounts offered rates between 4.11% and 4.30%. These accounts are federally insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per institution.
Certificates of Deposit (CDs) are time deposits where funds are locked in for a specified period, ranging from a few months to several years, in exchange for a fixed interest rate. Longer terms or specific market conditions often lead to higher yields for CDs. For instance, while a one-year CD might offer an average APY of around 1.63%, some competitive offers could reach up to 4.50% or more, depending on the term and institution.
High-yield corporate bonds are debt instruments issued by companies that carry lower credit ratings, often referred to as “junk bonds.” To attract investors, these companies offer higher interest payments compared to bonds issued by companies with stronger credit profiles. The increased yield compensates for the issuer’s lower credit quality.
Dividend stocks represent shares of companies that distribute a portion of their earnings to shareholders as dividends. Companies with a history of consistent dividend payments or those that pay a significant percentage of their profits as dividends can result in a high dividend yield. The dividend yield is calculated by dividing the annual dividend per share by the stock’s current share price.
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. Many REITs are structured to distribute a large portion of their taxable income to shareholders as dividends. To maintain their tax-advantaged status under U.S. tax law, REITs are generally required to distribute at least 90% of their taxable income to shareholders annually, often resulting in substantial dividend yields.
Key Characteristics of High-Yield Investments
High-yield investments exhibit certain fundamental attributes that contribute to their ability to offer elevated returns. These characteristics influence the compensation investors expect for holding such assets.
A primary factor for fixed-income investments, such as bonds, is credit quality. Bonds with lower credit ratings, often classified as non-investment grade by rating agencies like Standard & Poor’s, Moody’s, and Fitch, are perceived as having a greater likelihood of not fulfilling their payment obligations. Consequently, these issuers must offer higher yields to attract investors, providing compensation for the perceived higher level of obligation. For example, bonds rated below BBB- by S&P and Fitch, or below Baa3 by Moody’s, fall into this category.
The prevailing interest rate environment significantly influences yields across all financial products. When the Federal Reserve adjusts the federal funds rate, it affects borrowing costs throughout the economy, which in turn impacts the yields offered on various investments. A general increase in market interest rates typically leads to higher yields on newly issued bonds and other interest-bearing products. Conversely, in a low-rate environment, even investments considered “high-yield” might offer numerically lower percentages than they would during periods of higher overall rates.
Market demand and liquidity also play a role in determining an investment’s yield. Investments that are less liquid, meaning they cannot be easily converted to cash without a significant price impact, may offer higher yields to entice investors. Similarly, if there is limited demand for a particular investment, its issuer might need to offer a higher return to attract the necessary capital.
For equities, particularly dividend stocks, company-specific factors contribute to their high yield. A high dividend yield might indicate a mature company that consistently generates substantial earnings and returns a significant portion of those profits to shareholders. However, a high dividend yield can also reflect market perceptions regarding a company’s future growth prospects or stability. If a company’s stock price declines while its dividend payment remains constant, the dividend yield will increase, potentially signaling concerns about the company’s outlook.