Earnings Yield vs Bond Yield: Cheap or Dear?

A relative asked me last month whether he should move some money from his fixed deposit into a "safe, quality" stock everyone in his WhatsApp group was buying. His bank FD was paying him about 6.7% a year. I asked him a single question back: if you buy that stock, how much does the business earn for you, per year, on the money you put in? He had no idea. Nobody in the group had asked. They were comparing the stock to nothing at all.

That question — what does this business pay me, versus what the safest thing in the country pays me? — is the simplest sanity check in all of investing. It takes thirty seconds, it needs no spreadsheet, and it would have saved a lot of people a lot of grief. Let me show you how to run it.

The rent a business pays you

Think of a stock the way you'd think of a flat you buy to rent out. You hand over a lump sum. In return, the flat throws off rent every year. Divide the annual rent by the price you paid, and you get the rental yield — say ₹3 lakh of rent on a ₹1 crore flat is a 3% yield. That single number tells you, instantly, whether the flat is a sensible use of money or a vanity purchase.

A business does the same thing. The "rent" is its annual profit. The price is its market value. Divide one by the other and you get the earnings yield — the profit the business earns each year for every rupee you pay to own it.

The formula is just the famous P/E ratio (price-to-earnings) turned upside down:

A stock on a P/E of 20 has an earnings yield of 1/20 = 5%. A stock on a P/E of 10 yields 1/10 = 10%. The higher the P/E, the lower the rent you collect for your money — which is exactly why a high P/E should make you ask harder questions, not fewer.

Now you have a number you can hold up against the FD.

The yardstick: India's 10-year G-Sec

Every yield needs something to be measured against. The natural yardstick is the safest return available in the country — what the Government of India pays to borrow money for ten years, the 10-year G-Sec (government security, the wholesale cousin of your bank FD).

As of 23 June 2026, the 10-year G-Sec yields about 6.84% (Trading Economics, June 2026). That is your floor. It is roughly risk-free, it is liquid, and it requires zero work — no concalls to read, no management to second-guess. Any business you buy is competing with it for your rupee.

So the sanity check is one comparison:

Buffett built his whole approach on this idea. As he has often put it, interest rates are to asset prices what gravity is to the apple: when rates are low, the downward pull on prices is weak; when rates are high, it is strong. When the G-Sec is high, it pulls every stock's fair price down. When it's low, it lets prices float higher. You cannot judge whether a stock is cheap without knowing what gravity is doing.

Sun Pharma, run through the check

Let's do it on a business everyone in India knows — the country's largest drugmaker, Sun Pharma. (To be clear, this is a worked example to teach the method, not a view on whether to buy or sell the stock.)

Over the last twelve months, Sun Pharma earned a net profit of about ₹10,953 crore, on sales of roughly ₹56,809 crore (Inve data, 2026). At a recent share price of about ₹1,820 (May 2026), the market values the whole company at about ₹4,36,727 crore (Inve data, 2026).

Now the arithmetic, slowly:

• P/E = ₹4,36,727 crore ÷ ₹10,953 crore = about 40. You are paying ₹40 for every ₹1 of annual profit.
• Earnings yield = 1 ÷ 40 = about 2.5%.

Hold that 2.5% up against the 6.84% G-Sec, and the gap does the talking. The business is paying you roughly 2.5% rent; the government will pay you 6.84% to do nothing, risk-free. Put the same ₹4,36,727 crore into the 10-year G-Sec and it would throw off about ₹29,900 crore of interest a year — against the ₹10,953 crore Sun Pharma actually earns on that money today (Inve data, 2026). The bond pays you roughly two and three-quarter times as much, this year, for less risk.

That is the whole reveal. At today's price you are not buying this year's profit at all — you are buying a bet that the profit grows fast enough, for long enough, to one day justify the price. Sometimes that bet pays. Often it doesn't.

Why this is a sanity check, not a verdict

Here is where most beginners over-steer, so let me state the opposing case as fairly as I can — because if a 2.5% yield were always a sell, no quality compounder would ever be ownable.

A low earnings yield is not a death sentence. It is the market saying "this business will earn far more in the future than it does today, and I'll pay up for that now." For a genuinely great business that grows profit at 15-18% a year for a decade, a high starting P/E can still work out, because the future earnings yield — the rent five or ten years from now, on the price you paid today — turns out fine. That is the steelman, and it's real.

The catch is that the price obliges the business to keep growing fast, and you have to check whether the guidance actually supports that. Sun Pharma is instructive precisely here. Its profit has been compounding nicely, but for the current year management has guided only to mid-to-high single-digit revenue growth for FY26, leaning on new specialty launches to do the heavy lifting (eHealth, June 2025). A 40x P/E paired with single-digit guided revenue growth is exactly the tension the earnings-yield check is built to surface: the rent is small now, and whether that's fine depends entirely on how durable the growth ahead really is — and on Inve's record, whether each specialty and launch commitment management makes actually lands quarter after quarter (Inve data, 2026).

So the rule isn't "high P/E bad." The rule is: a low earnings yield obliges the business to grow into it — so go check whether it actually can, using what management has guided and whether they tend to deliver. You can read that record — what each company guided and quietly dropped — in Inve's Promise Tracker, which is the slow, manual job nobody can do by hand across a whole portfolio.

How to use the number in real life

Treat earnings yield as a triage tool, not a final answer:

• Compute it in your head: flip the P/E. P/E 14 → ~7% yield. P/E 50 → 2%. P/E 100 → 1%.
• Compare it to ~6.84% (today's G-Sec — check the live figure, it moves). A yield far below the G-Sec means you're paying entirely for future growth. A yield above it means the business is, at least, paying its way today.
• Then do the work. If the yield is low, the only thing that justifies the price is durable growth — so test the moat and the margin of safety before you decide the premium is earned.

The earnings yield won't tell you what to buy. It tells you what question to ask next — and stops you, like my relative, from comparing a stock to nothing at all.

Frequently asked questions