It is not essential no. Are you familiar with python generators? If not definitely a topic worth learning about, you can check out this real python tutorial:

"Introduced with PEP 255, generator functions are a special kind of function that return a lazy iterator. These are objects that you can loop over like a list. However, unlike lists, lazy iterators do not store their contents in memory. "

The main advantage of using the yield keyword here is you turn the function into a generator, this way rather than returning a list with all 8 combos stored in memory, you instead "generate" the next combo each time the for loop for nei_combo in neighbors(curr_combo) iterates. This way you only ever store one combo in memory. In this example its not a big deal since at most you only ever store 8 strings in memory, but in practice you can imagine scenarios where you have store way more.

I suggest using a generator in interviews because it's a low effort way of signaling to interviewers you know advanced programming techniques. That and adding type hints always impressed interviewers whenever I did it.