What Is Effective Yield and Why It Matters for Income Investors

Two investors buy the same preferred stock. One purchases at $100 per share. The other buys later at $95. Both receive identical cash dividends every month — but their actual return on capital deployed is different. This difference is captured by the concept of effective yield, and understanding it is essential for evaluating any publicly traded income instrument.

Stated yield versus effective yield

Stated yield (also called nominal yield or coupon rate) is the annual dividend expressed as a percentage of the par value — the price the instrument was originally issued at. If preferred stock has a $100 par value and pays $13 per year in dividends, its stated yield is 13%.

Effective yield (also called current yield or running yield) is the annual dividend expressed as a percentage of the current market price. If that same stock is trading at $95, the effective yield is 13 ÷ 95 × 100 = 13.68%. If it is trading at $106, the effective yield is 13 ÷ 106 × 100 = 12.26%.

Stated yield is fixed at issuance. Effective yield changes continuously as the market price moves.

Why the price drifts from par

Preferred equity is publicly traded, so its price responds to supply and demand, interest rate expectations, issuer-specific news, and general market sentiment. Even instruments with adjustable rates — like STRC, which reviews its rate monthly — experience short-term price movements around par. For instruments with fixed rates, the price can move significantly in response to changes in the broader rate environment.

The result is that an income instrument's effective yield is rarely exactly equal to its stated yield. Understanding which you are looking at matters enormously for comparing opportunities.

The effective yield is what you actually earn

When you buy STRC or SATA in the open market, you are buying at the current price — not at par. Your actual return on the capital you deploy is the effective yield at your purchase price, not the stated rate. If you pay $103 for a share that pays $11.50 per year, your effective yield is 11.17%, not 11.50%. On a large position, that difference is material.

Conversely, if a price dip takes STRC to $97, a buyer at that price achieves an effective yield of approximately 11.86% — meaningfully above the stated 11.50%. Price dislocations from par can represent genuine opportunities for income investors who understand what they are measuring.

Yield on cost: your personal return

Once you have purchased, your cost basis is fixed. The yield on cost — the annual dividend as a percentage of what you actually paid — does not change as the market price moves. If you bought at $97 and the price later rises to $104, you are still receiving the same cash per share. Your personal yield on cost remains approximately 11.86%. The live effective yield quoted on the site reflects the current market price, which is relevant to new buyers — not to your existing position.

The effective yield chart

The yield chart on the STRC chart page and SATA chart page tracks effective yield over time. A rising line means the price has fallen relative to the dividend — the instrument has become better value for new buyers. A falling line means the price has risen above its historical norm. Reviewing this chart over several months gives meaningful context for whether current pricing represents an attractive or expensive entry point.

Yield and compounding in the Growth Projector

The Growth Projector uses effective yield to model portfolio growth. When dividend reinvestment is toggled on, it assumes reinvested dividends purchase additional stock at the current effective yield. This means the compounding model reflects what a buyer at today's price would actually earn — not a theoretical par-based return. Even small differences in effective yield produce meaningfully different outcomes over ten or twenty year horizons, which is why tracking it accurately matters.

This article is for educational purposes only and does not constitute financial advice. Always consult a qualified financial adviser before making investment decisions.