In finance, yield refers to the return or income generated by an investment. It represents the earnings or cash flows an investor receives relative to the amount invested or the current market price of the investment.
Here are some key points about yield:
- Investment Income: Yield is often associated with the income or returns generated by fixed-income investments, such as bonds, certificates of deposit (CDs), or dividend-paying stocks. It represents the interest, coupon payments, or dividends received from these investments.
- Calculation: Yield can be calculated in different ways depending on the type of investment. For bonds, yield is typically expressed as a percentage of the bond's face value and considers factors such as the coupon rate, the bond's current market price, and its remaining maturity. Dividend yield for stocks is calculated by dividing the annual dividend payment by the stock's current market price.
- Yield to Maturity (YTM): Yield to maturity represents the total return an investor can expect to earn on a bond if held until maturity. It considers the bond's coupon payments, purchase price, and the time remaining until maturity.
- Current Yield: Current yield is a simple measure of the income generated by a bond and is calculated by dividing the annual coupon payment by the bond's current market price.
- Yield on Cost: Yield on cost is used to measure the current yield of an investment relative to its original cost or purchase price. It is calculated by dividing the current annual income (such as dividends or coupon payments) by the initial investment cost.
- Dividend Yield: Dividend yield is a measure of the income generated by a stock relative to its current market price. It is calculated by dividing the annual dividend per share by the stock's current market price.
- Yield Curve: The yield curve is a graphical representation of the yields of fixed-income securities, such as bonds, plotted against their respective maturities. It shows the relationship between interest rates (or yields) and the time to maturity, providing insights into market expectations and economic conditions.
- Total Return: Yield is a component of total return, which represents the overall gain or loss from an investment. Total return includes both yield (income) and any capital appreciation or depreciation of the investment.
- Risk and Yield: Generally, higher yields are associated with higher risk. Investments offering higher yields often involve greater potential for volatility, credit risk, or other uncertainties. It is important to carefully assess the risk-return trade-off when evaluating investments based on their yield.
Investment yield is the most common, and the one you're most likely to encounter. It will also be the most relevant to you as you manage your assets on the Strabo dashboard. Here are some common examples of investment yield and how they occur:
- Bond Yield: In the context of bonds, yield represents the interest rate earned on a bond investment. It is typically calculated as the annual interest payment divided by the bond's current market price. Bond yield can be further categorised into:
a. Coupon Yield: This refers to the interest payment received relative to the bond's face value.
b. Current Yield: This is calculated by dividing the annual interest payment by the bond's current market price.
c. Yield to Maturity (YTM): YTM considers both the interest payments received and any capital gains or losses if the bond is held until maturity.
- Dividend Yield: For stocks, yield refers to the dividend income generated by owning a particular stock. This is not payable for all stocks, and can either be taken as income (INC) or reinvested (ACC). It is calculated by dividing the annual dividend payment by the stock's current market price.
- Rental Yield: In property investing, rental yield represents the income generated from rental properties. It is calculated by dividing the annual rental income by the property's value, expressed in percentage terms. This is the best way of comparing property with other kinds of investment on an equal basis.
- Yield on Other Investments: The concept of yield can also be applied to other investments such as mutual funds, exchange-traded funds (ETFs), and even savings accounts. In these cases, yield refers to the return earned on the investment over a specific period and is often expressed as an annual percentage. This means that you can calculate the % yield on anything that makes a return.
Yield is an important metric for investors to consider when assessing the income-generating potential of an investment. It provides a measure of the return on investment and can be compared to other investment options or used as a basis for making investment decisions. However, it is crucial to consider other factors such as risk, market conditions, and the investment's overall suitability within an individual's investment objectives and risk tolerance.