March 24, 2023
You are a new retail shareholder and you’ve opened a brokerage account and added some stocks to your portfolio. How do you measure the performance of your account? An important way to track the health of your assets is by tracking yield.
Yield refers to the earnings generated and realized on an investment over a particular period of time, according to Investopedia. It is expressed as a percentage based on the invested amount, current market value or face value of the security. It includes the interest earned or dividends received from holding a particular security. Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as known or anticipated.
Yield is different from the total return on an investment, which is a more comprehensive measure, but it is still a valuable tool for individual investors. Companies or retail shareholders use yield to estimate future net earnings and express it as a percentage of an investment’s value. Return, on the other hand, is the amount an investor gains or loses from an investment over a period, often expressed as a dollar amount. Return are earnings that already have occurred. Yield does not incorporate capital gains, while return factors in capital gains, interest and dividends. Yield focuses on the cash flow the retail shareholder receives on the amount invested and is often calculated on an annual (most common), quarterly or monthly basis.
According to Investopedia, higher yields are perceived to be an indicator of lower risk and higher income, but a high yield may not always be a positive, such as the case of a rising dividend yield due to a falling stock price.
So how do you calculate yield? First, determine the market value or initial investment of the stock or bond. Second, determine the income you’ve made from the investment. Third, multiply that amount by 100. Use the following formulas to determine yield depending on the type of investment.
• Stock yield = (dividends per share/stock price) x 100
• Bond yield = (coupon/bond price) x 100
• Real estate yield = (net rental income/real estate value) x 100
Here's an example of calculating stock yield, though any type of stock or bond would work in a similar way:
The retail investor has a stock with a share price of $125 that pays an annual dividend of $4.50 a share. To determine yield, the individual investor divides this by its share price and multiplies it by 100. Stock yield = ($4.50/$125) x 100. Stock yield = 0.036 x 100. Stock yield = 3.6%.
Now that you’ve calculated yield, here’s what it means: A higher yield often means an investment is at lower risk and earning a higher income. It is important to note that when yields get too high, it can reveal a decreasing stock price or a company that’s paying higher dividends, which could be a potential warning sign. Lower yields also can indicate low earnings and higher risk. In general, dividend yields of 2% to 4% are considered strong. A stock with a yield above 4% can be a good buy, but it can also be risky.
Retail shareholders should never use yield alone as an indicator of a stock’s health. Yield is an important tool, but make sure to weigh it alongside other indicators like earnings per share, share price and price-to-earnings ratio.
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