What Is a Good Free Cash Flow Yield? Benchmarks by Sector (2026)

What Is a Good Free Cash Flow Yield? Benchmarks by Sector (2026)

You've calculated the free cash flow yield for a stock. Now what?

Knowing a company generates a 4% FCF yield is only useful if you know whether 4% is exceptional, average, or a red flag for that type of business. A 4% FCF yield in the energy sector suggests the market is pricing in serious risk. The same 4% in enterprise software suggests investors are paying a steep premium for growth.

Free cash flow yield has no universal "good" number. But it does have sector-specific benchmarks, and understanding those benchmarks is what separates a useful screen from a misleading one. This guide covers the S&P 500 baseline in 2026, FCF yield benchmarks for all 10 sectors, why high yield can mean value or danger, how quality filters change the picture, and a practical decision framework you can apply today.

⚠️ Important Disclaimer: This analysis is for educational purposes only and does not constitute investment advice, financial advice, or any recommendation to buy, sell, or hold any security. You should conduct your own research and consult with a licensed financial advisor before making any investment decisions. Past performance does not guarantee future results.

📊 The Baseline: S&P 500 FCF Yield in 2026

The S&P 500's aggregate free cash flow yield has hovered between 3% and 4% for most of the post-2020 period, reflecting elevated valuations across large-cap US equities.

Benchmark FCF Yield
S&P 500 (aggregate, 2026 est.) ~3.2%
S&P 500 historical average (2000–2020) ~4.5%
10-year US Treasury yield (for comparison) ~4.3%

The comparison to the 10-year Treasury is intentional. When the risk-free rate approaches or exceeds the equity FCF yield, stocks offer less compensation for the additional risk of owning businesses. This relationship — sometimes called the FCF yield spread — is one reason valuations matter beyond just the yield number itself.

💡 A 3% FCF yield on a growing software business may be more attractive than a 9% FCF yield on a shrinking coal producer. The number is a starting point, not a verdict.

📈 FCF Yield Benchmarks by Sector (2026)

The table below shows typical FCF yield ranges for S&P 500 constituents, based on trailing twelve-month data. These are ranges, not targets — companies within each sector vary widely.

Sector Typical FCF Yield Range Key Driver
Technology (Software/SaaS) 2%–5% Growth premium; high reinvestment
Technology (Hardware/Semis) 3%–7% CapEx cycles; IP leverage
Consumer Staples 4%–7% Predictable cash flows; modest growth
Healthcare 3%–6% R&D drag; patent cliff risk
Communication Services 5%–9% Legacy revenue decline; content spend
Industrials 4%–8% CapEx-heavy; cyclical variation
Consumer Discretionary 3%–7% Cyclical sensitivity; brand leverage
Energy (Oil & Gas) 7%–14% Commodity price exposure; depletion risk
Utilities 4%–7% Regulated returns; rate sensitivity
Materials 5%–10% Commodity cycles; capital intensity

How to read this table: If a software company shows a 9% FCF yield, either the market sees a structural problem, or there's a genuine mispricing worth investigating. If an energy company shows a 4% FCF yield, investors may be pricing in significant growth expectations — or the business is unusual for its sector.

⚠️ Why High FCF Yield Isn't Always "Better"

A high FCF yield is often the first screen value investors run. But yield is a two-sided signal.

✅ High Yield Can Mean Undervaluation

  • ✅ Market mispricing: The business has been overlooked or misunderstood
  • ✅ Temporary headwinds: Near-term pressure is masking durable cash flows
  • ✅ Out of favor: Cyclical trough, bad headline, or sector rotation

❌ High Yield Can Mean Structural Risk

  • ❌ Terminal decline: The business faces a shrinking addressable market
  • ❌ Deferred maintenance: FCF is temporarily inflated by postponed CapEx
  • ❌ Commodity peak: Prices are elevated and FCF will fall with them
  • ❌ Debt burden: Heavy leverage makes free cash flow unavailable to equity holders in practice

⚠️ The 80/20 Rule

Most FCF yields in the 10%+ range reflect risk the market is pricing correctly — not mispricing. The more interesting cases tend to be in the 5%–9% range, where quality businesses occasionally trade at discounts to their sector norms.

🎯 The Quality Adjustment: Buffett's Missing Variable

Raw FCF yield ignores the durability of the cash flow. A 6% FCF yield from a business with a structural moat is categorically different from a 6% FCF yield from a business losing market share.

Warren Buffett's owner earnings framework adds this dimension. He asks not just "what is the yield today?" but "how confident am I that this yield persists or grows over the next decade?"

💰 Three Quality Filters to Apply Alongside FCF Yield

  • 1. FCF Consistency — Has the company generated positive FCF in 8 of the last 10 years? Consistent generators warrant a lower required yield than cyclical ones.
  • 2. FCF/Net Income Ratio — A ratio consistently above 100% suggests earnings quality: cash exceeds reported profits. A ratio below 70% warrants scrutiny.
  • 3. CapEx as % of Operating Cash Flow — Below 25% typically signals an asset-light model. Above 50% signals capital intensity that constrains free cash flow sustainability.

A business scoring well on all three filters can justify a lower FCF yield than its sector average. A business failing all three should trade at a meaningful premium yield to compensate for the added uncertainty.

🔍 A Practical Decision Framework

Rather than asking "is this FCF yield good?", a more useful question is: "Is this FCF yield appropriate for this type of business?"

  1. Compare to sector median — Pull the company's FCF yield and compare it to the sector range in the table above. Is it at the high end, low end, or middle?
  2. Check the quality factors — Apply the three quality filters above. Does the business deserve a premium or discount to sector norms?
  3. Compare to the risk-free rate — If the FCF yield is below the 10-year Treasury yield (~4.3% in 2026), ask what growth rate justifies the premium valuation. Is that growth rate realistic?
  4. Stress-test the FCF — What would FCF look like in a recession? In a commodity downturn? If the answer is "much lower," the current yield overstates the business's normalized earning power.
💡

Try it yourself: Use the FCF yield calculator to model these scenarios at different price and FCF assumptions.

📊 Sector Deep Dives: All 10 Sectors Explained

The benchmark table gives you ranges. This section explains what drives those ranges and what to watch for when a company's yield sits at either extreme.

1. Technology — Software & SaaS (2%–5%)

Software and SaaS businesses trade at the lowest FCF yields in the market because investors are paying for future cash flows, not current ones. A company generating a 2%–3% FCF yield is implying P/FCF multiples of 33–50x — meaning investors expect that cash flow to grow substantially over the next decade.

The math works when it works: Microsoft's FCF yield compressed to around 2%–3% during peak growth phases, but the cash flow actually grew at double-digit rates, vindicating the premium. The risk is that growth disappointments cause rapid multiple compression. A software business that misses its growth trajectory doesn't just lose future earnings — it loses the multiple applied to current earnings too, which is a compounding loss.

What to watch at the extremes: A software company with a 6%+ FCF yield either has a structural problem (customer churn, competitive disruption, slowing growth) or is genuinely mispriced. Most of the time it's the former. Understanding FCF yield mechanics is essential before interpreting these valuations.

🎯

Key signal: Track FCF growth rate alongside yield. A 3% yield growing at 20% annually is far more attractive than a 5% yield growing at 5%.

2. Technology — Hardware & Semiconductors (3%–7%)

Hardware and semiconductor businesses have more variable FCF profiles than software because their economics are shaped by capital expenditure cycles and inventory dynamics. A chip company at the bottom of a semiconductor cycle — when inventory is elevated and orders are weak — can look expensive on FCF yield even when the business is fundamentally healthy. The same company at the peak of an upcycle can appear cheap.

IP leverage is the key differentiator within this sub-sector. Fabless chip designers (companies that design chips but outsource manufacturing) generate much higher FCF margins than integrated device manufacturers (IDMs) that run their own fabs. A fabless company at a 3% FCF yield and an IDM at a 3% FCF yield are very different propositions.

What to watch at the extremes: Hardware companies at 7%+ FCF yields are often at a cyclical peak — cash flow is elevated because demand is strong and inventory has normalized, but mean reversion typically follows within 12–24 months. Buyers at those yields often overpay on a through-cycle basis.

🎯

Key signal: CapEx as a percentage of revenue is the clearest dividing line. Below 5% typically indicates a fabless or asset-light model; above 15% signals a capital-intensive manufacturer.

3. Consumer Staples (4%–7%)

Consumer staples is the sector where FCF yield most closely resembles a bond coupon. Businesses like Procter & Gamble, Coca-Cola, and Colgate-Palmolive generate remarkably consistent free cash flow year after year, regardless of economic conditions. The 4%–7% range reflects modest growth expectations layered on top of that consistency.

The pricing power of branded consumer staples is the mechanism behind this reliability. A consumer who has bought the same laundry detergent for 20 years is insensitive to small price increases — and that pricing power shows up as sustained FCF even in inflationary environments. Both P&G and Coca-Cola — long-term Berkshire Hathaway holdings — have maintained FCF margins above 15% through multiple economic cycles.

What to watch at the extremes: A consumer staples company at 8%+ FCF yield typically faces one of three issues: market share erosion from private label competition, a balance sheet problem from an overleveraged acquisition, or a secular category decline. At 3% or below, investors are paying a growth premium that rarely materializes in this sector.

🎯

Key signal: Volume trends matter more than revenue here. Revenue can grow via pricing; volume declines signal that pricing power is being exhausted.

4. Healthcare (3%–6%)

Healthcare FCF yields are compressed by two structural factors: heavy R&D investment (which flows through operating cash flow) and patent cliff risk. A pharmaceutical company spending 20% of revenue on R&D will show lower FCF than its earnings suggest — and that R&D is not discretionary; it's the engine of future cash flows.

The sector is also highly bifurcated. A diversified healthcare conglomerate like Johnson & Johnson or a managed care organization like UnitedHealth Group has predictable, recurring FCF from insurance premiums and medical device sales. A pure-play biotech or a pharmaceutical company with a major patent expiring in two years has highly uncertain FCF. Both might trade at similar FCF yields, but the underlying risk profile is completely different.

What to watch at the extremes: Healthcare companies at 6%+ FCF yields often have a patent cliff approaching — a major drug losing exclusivity that will materially reduce FCF within 2–4 years. At 2%–3% yields, the market is typically pricing in significant pipeline success that may not materialize.

🎯

Key signal: Check revenue concentration. If a single drug represents more than 20% of revenue and has a patent expiring within 5 years, the headline FCF yield overstates long-term earning power.

5. Communication Services (5%–9%)

Communication services is the most internally divided sector in the S&P 500. It contains traditional telecom and cable businesses (AT&T, Verizon, Comcast) alongside digital advertising and social media giants (Alphabet, Meta). These sub-sectors have almost nothing in common from a FCF perspective, yet they share a GICS sector classification.

Traditional telecom and cable companies trade at higher FCF yields (6%–9%) because they face secular headwinds: cord-cutting, wireline revenue decline, and massive CapEx requirements for 5G and fiber buildout. Verizon, for example, has traded at FCF yields of 7%–9% in recent years — reflecting the market's skepticism about whether its capital-intensive growth investments will translate into durable cash flow. The Verizon FCF deep dive on this site examines that question in detail. Digital platforms like Alphabet and Meta trade at lower FCF yields (4%–6%) because their CapEx requirements are lower relative to their cash generation, and their growth profiles are stronger.

What to watch at the extremes: For traditional telecom, a 10%+ FCF yield often signals that the market expects FCF to decline — not that the stock is cheap. For digital platforms, a yield below 3% implies aggressive growth assumptions that may not survive increased regulation or advertiser cyclicality.

🎯

Key signal: Separate the sub-sectors. Comparing a cable company's FCF yield to a social media company's is not meaningful — they are fundamentally different businesses inside the same sector label.

6. Industrials (4%–8%)

The industrials sector spans aerospace, defense, transportation, machinery, and professional services — businesses with significantly different FCF profiles. Defense contractors (Lockheed Martin, Raytheon) generate highly predictable FCF tied to multi-year government contracts. Transportation businesses (UPS, FedEx) are more cyclically sensitive. Capital equipment manufacturers (Caterpillar, Deere) swing widely with commodity and agricultural cycles.

The common thread is that CapEx requirements are meaningful across the sector, which suppresses FCF relative to operating income. An industrial business with strong FCF conversion — operating cash flow converting to FCF at 70%+ — is more valuable than the yield alone suggests, because CapEx is being managed efficiently relative to peers.

What to watch at the extremes: Industrials companies at 8%+ FCF yields are often at a cyclical trough, generating strong cash flow because maintenance CapEx has been deferred. At 3% or below, the market is typically pricing in a multi-year growth cycle that may already be partially reflected in the price.

🎯

Key signal: Backlog levels. A company with a growing backlog and a high FCF yield is more attractive than one with a shrinking backlog at the same yield — the backlog provides visibility into future cash generation.

7. Consumer Discretionary (3%–7%)

Consumer discretionary is the most economically sensitive sector, and FCF yields reflect that sensitivity. The sector includes luxury goods, restaurants (McDonald's, Chipotle), home improvement (Home Depot, Lowe's), e-commerce (Amazon), and automotive. Amazon skews the sector's aggregate yield lower than most individual constituents would suggest — its massive FCF generation and cloud business create a mixed picture.

Brand leverage is the key quality differentiator. McDonald's franchised model generates exceptional FCF with minimal CapEx (most CapEx falls on franchisees). Home Depot benefits from a structurally undersupplied housing market and a professional contractor customer base that provides more stability than its retail classification suggests. Stripping out Amazon, consumer discretionary yields tend to track the economic cycle: expanding during consumer downturns and compressing during expansions.

What to watch at the extremes: Companies at 7%+ FCF yields in this sector are often being priced for a recession or structural decline. At 2%–3%, the market is paying up for a luxury or high-growth brand where FCF growth expectations may be ambitious.

🎯

Key signal: Same-store sales trends. A company with improving same-store sales and a high FCF yield is much more attractive than one with flat or declining same-store sales at the same yield.

8. Energy — Oil & Gas (7%–14%)

Energy companies consistently screen as the "cheapest" sector on FCF yield — and there are structural reasons for both the high yield and for why it doesn't automatically mean a compelling opportunity. The energy sector's FCF is directly tied to commodity prices that are outside any management team's control and can move 50%+ in either direction within 18 months.

The 2022–2023 period illustrates the risk clearly. Many E&P companies showed FCF yields of 12%–15% in 2022 when oil prices peaked near $120/barrel. By 2023, with oil in the $70s, those yields had collapsed by half — not because the businesses changed, but because commodity prices did. Investors who bought at peak FCF yields paid peak prices for peak cash flows. The limitations of FCF yield analysis are particularly relevant in energy.

What to watch at the extremes: An energy company at 14%+ FCF yield is almost certainly near a commodity price peak. The high yield reflects the market's skepticism that those cash flows are repeatable. Within energy, not all models are equal: integrated majors (ExxonMobil, Chevron) have downstream businesses that partially hedge commodity exposure, while pure-play E&P companies carry full commodity risk.

🎯

Key signal: Through-cycle FCF, not spot FCF. Calculate what FCF looks like at $60/barrel oil rather than current prices. If the yield is still compelling at that stress price, the opportunity may be genuine.

9. Utilities (4%–7%)

Utilities are the most bond-like equity sector, and their FCF yields behave accordingly. Regulated utilities earn allowed returns set by state utility commissions — predictable, but constrained. That regulatory predictability creates FCF stability, which is why utilities attract income-oriented investors who might otherwise own bonds.

The challenge with utilities FCF is that regulatory accounting creates a gap between reported earnings and actual free cash flow. Utilities have enormous CapEx requirements — grid modernization, renewable energy buildout, natural gas distribution upgrades — and those investments often depress FCF below earnings for years at a time. The Inflation Reduction Act has significantly changed the capital deployment math for regulated utilities with renewable energy assets, as IRA tax credits effectively lower the cost of capital for qualifying investments.

What to watch at the extremes: Utilities at 7%+ FCF yields typically face balance sheet pressure (high debt from past CapEx), regulatory uncertainty (a contested rate case), or weather-related impacts. At 4% or below, investors are pricing in a premium income vehicle — a valuation that becomes vulnerable when interest rates rise.

🎯

Key signal: Regulated vs. unregulated revenue mix. A utility with 90%+ regulated revenue has predictable allowed returns; one with significant merchant power generation has commodity exposure that the utility label obscures.

10. Materials (5%–10%)

Materials is a broad sector encompassing commodity chemicals, specialty chemicals, metals and mining, paper and packaging, and construction materials. The FCF yield range reflects the spectrum from highly cyclical pure-commodity businesses (iron ore miners, basic chemical producers) to more stable, value-added businesses (packaging, specialty adhesives).

Commodity cycle timing is everything in this sector. A steel producer or copper miner may generate a 12%+ FCF yield at a commodity price peak, but those cash flows are explicitly temporary — the market applies a low multiple because investors know prices will mean revert. China demand is the most important external variable: Chinese construction, infrastructure, and manufacturing activity drives demand for steel, copper, aluminum, and many basic chemicals, and this macro dependency is largely outside company-specific analysis.

What to watch at the extremes: Materials companies at 10%+ FCF yields are almost invariably at a commodity price peak — buying at those yields typically means buying at peak margins. At 5%, the market may be underestimating the durability of a specialty materials business's pricing power relative to its commodity-facing peers.

🎯

Key signal: Distinguish commodity processors from value-added specialty businesses. The former should always trade at a discount to the latter, even at identical yield levels — the cash flow durability is fundamentally different.

📈 What FCF Yield Level Has Historically Indicated Outperformance?

Factor investing practitioners and academic researchers who study value signals generally find a consistent pattern across markets:

  • ✅ Stocks in the top quintile of FCF yield (highest 20% within their sector) have historically outperformed their sector median over 5-year holding periods
  • ⚠️ The effect is strongest in value-oriented sectors (industrials, materials, energy) and weakest in high-growth sectors (technology, healthcare)
  • ✅ Quality-adjusted FCF yield — combining yield with consistency measures — shows stronger predictive power than raw yield alone

This is the foundation of systematic FCF yield screening: not buying the highest absolute yield, but identifying companies trading at a meaningful discount to their sector-adjusted fair value, with durable cash flows. The quality filters described above — consistency, FCF/Net Income ratio, and CapEx intensity — are the practical tools for making that distinction.

❓ Frequently Asked Questions

What is a good free cash flow yield for a stock?

There is no single universal threshold, but as a general framework: an FCF yield above the 10-year Treasury rate (currently ~4.3%) provides a positive spread over the risk-free rate. Within sectors, yields in the top quartile relative to peers — combined with consistent FCF generation — have historically been associated with outperformance. Most practitioners consider 5%–8% a reasonable starting range for value-oriented screening, adjusted by sector.

What is the average FCF yield of the S&P 500?

The S&P 500's aggregate FCF yield is approximately 3–4% as of 2026, reflecting elevated valuations relative to the historical average of ~4.5%. Individual sectors vary considerably, from 2%–5% in software to 7%–14% in energy.

Is a high FCF yield always good?

No. A high FCF yield can reflect genuine undervaluation, but it can also indicate that the market is pricing in significant risks: business decline, commodity exposure, balance sheet stress, or temporarily inflated FCF that will normalize lower. High yield should prompt further investigation, not automatic optimism.

What FCF yield does Warren Buffett look for?

Buffett has not publicly specified a target FCF yield threshold. His framework focuses more on the quality and durability of cash flows than on a specific yield number. However, his major acquisitions have generally implied FCF yields of 5%–10% at purchase, combined with high confidence in the business's long-term cash generation ability — what he calls "owner earnings."

How does FCF yield compare to dividend yield?

FCF yield measures the total free cash flow a business generates per dollar of market value — regardless of what management chooses to do with it. Dividend yield measures only the portion returned to shareholders as dividends. A company with a 6% FCF yield and a 2% dividend yield is retaining 4% for buybacks, debt paydown, or reinvestment. FCF yield is the broader, more fundamental measure.

📝 Conclusion

A "good" FCF yield is always relative: relative to the sector, relative to the risk-free rate, relative to the quality and durability of the underlying cash flows.

The S&P 500 baseline of ~3–4% is useful as a broad reference point. The sector benchmarks covered here provide a more precise frame of reference for each of the 10 major S&P 500 sectors. And the quality filters — FCF consistency, FCF/Net Income ratio, CapEx intensity — help determine whether a given yield deserves a premium or a discount relative to sector norms.

The most useful screen combines all three: yield relative to sector norms, quality indicators that assess durability, and a comparison to the risk-free rate that anchors the valuation in a broader market context.

Use the FCF yield calculator to run your own analysis across different price and FCF scenarios.

Disclaimer: This analysis is for educational purposes only and does not constitute investment advice, financial advice, trading advice, or any other type of advice. You should not make any investment decision based solely on this analysis. Always conduct your own due diligence and consult with a licensed financial advisor before making any investment decisions. Past performance does not guarantee future results. All investments carry risk, including the potential loss of principal.

Want to go deeper? Explore our complete guide to FCF yield or learn about the limitations of FCF analysis.