To get the earnings yield, take any company’s earnings and divide them by the price and that would give you the earnings yield. Every FAST Graphs gives you the earnings yield in the FAST FACTS box. That’s the earnings yield.
Here is some more information that will help.
You need to think of the earnings yield analogous to a dividend yield. With a dividend yield, the company pays out a percentage of their earnings in the form of dividend, and that gives you a yield. In the case of earnings yield, you would be receiving 100% of all the company's earnings instead of a payout ratio. So just like a dividend yield, you have to ask yourself what yield would you consider acceptable for the amount of risk you have to assume to earn it?
My logic goes something like this: The long-term average rate of return for stocks has been 6-8%. Consequently, I am looking for an earnings yield where the company's profitability is providing me as a minimum 6.5 to 7% earnings yield. However, the higher - the better. In other words, I'd rather see a 9% earnings yield than a 6% earnings yield assuming the company was solid and growing.
So to summarize, why would I invest in a stock if the company's total earnings power did not reward me at least to the level that the average return from stocks has delivered? Additionally, this concept applies to most stocks (average). On the other hand, for very fast growth stocks (companies growing earnings at 15% or better) I am willing to accept a lower earnings yield on the notion that future earnings yields will be significantly higher than the average company. Of course, you simultaneously have to recognize that you are taking a greater risk when you are doing that.
Finally, the earnings yield concept is not etched in stone. It's a simple concept that is based on the reality of value investing, which means that when you pay value, you fully participate in the benefit the company delivers on an operating basis. In other words, the earnings yield is a minimum barometer that happens to work out to a P/E ratio of 15. One divided by 15 is 6.67%, this is my 15 P/E ratio that is so commonly expressed on your FAST Graph.
Regards,
Chuck