When it comes to investing, there are two ways to make money: capital gains and income. Capital gains occur when the value of an investment increases over time. Income, on the other hand, comes in the form of dividends, coupon payments, or other cash outlays associated with ownership of an asset.
What is performance in finance?
Yield refers to the income received from an asset or investment over a certain period of time, often annually, as a proportion of the investment itself. It is expressed as a percentage of the purchase price, nominal value or market value of the associated asset.
For example, if a stock with a market value of $50 paid $1.75 in dividends over the course of a year, its annual return would be 3.5% because $1.75 is 3.5% of $50.
It’s important to note that return excludes capital gains (changes in the value of the investment or the asset itself): it only refers to income received due to ownership of an asset. That asset could be a stock, a bond, or even real estate.
How is performance calculated?
Yield is calculated by dividing the income derived from owning an asset over a certain period of time, often a year, by the value or purchase price of that asset. Let’s take a look at how to calculate the return on a few different types of assets.
Dividend Yield of a Stock
Dividend Yield of a Stock = Total Annual Dividends / Share Price
Dividend Yield Example
Let’s say a stock is trading at $67 and pays a quarterly dividend of $0.45. What is your annual dividend yield?
Dividend Yield = Total Annual Dividends / Stock Price
Dividend Yield = ($0.45 + $0.45 + $0.45 + $0.45) / $67
Dividend Yield = $1.80 / $67
Dividend Yield = 0.02686 = 2.68%
bond yield
Bond Yield = Annual Coupon Payment / Bond Price
Bond Yield Example
Let’s say a bond trades at $300 and pays a coupon of $6 twice a year. What is the current annual yield of the bond?
Bond Yield = Annual Coupon Payment / Bond Price Price
Bond Yield = ($6 + $6) / $300
Bond Yield = $12 / $300
Bond Yield = 0.04 = 4%
Rental Property Yield
Rental Property Yield = Annual Rental Payments / Rental Property Value
Rental Property Yield Example
Let’s say an investor owns a home worth $150,000 and the tenants pay him $750 in rent each month. What is the annual yield of the rental property?
Rental Property Yield = Annual Rental Payments / Property Value
Rental Property Yield = ($750 * 12) / $150,000
Rental Property Yield = $9,000 / $150,000
Rental Property Yield = 0.06 = 6%
What is the difference between throughput and throughput?
While return only takes revenue into account, total return also includes gains (increases in the value of an asset).
For example, let’s say a stock was purchased for $45. Over the course of a year, let’s say you paid $3 in dividends and increased its value to $55. At the end of the year, the dividend yield on the stock would be 5.5% ($3 / $55). Your total return, which includes capital gains ($10) and dividends ($3), would be 23.6% ($13 / $55).
What types of assets offer high returns?
Many different assets provide income and therefore offer a return. Assets that consistently provide income payments at a fixed rate on a regular basis are called fixed income investments. Below are some examples of assets known to provide their owners with a regular cash flow.
- Properties to rent: Investors who own real estate can rent out their property and receive regular rental payments from its tenants.
- REIT: Real estate investment trusts, or REITs, are companies that invest in real estate and/or real estate loans and distribute 90% or more of their annual earnings to shareholders as dividends.
- Captivity: Bonds are loans from investors to corporations or governments and pay a fixed coupon rate expressed as a percentage of their face value. So-called “junk” bonds often offer the highest yields, but they also tend to have the highest risk of default.
- Preferred stock: Some companies offer preferred shares in addition to common shares. These shares generally pay a regular fixed dividend that takes precedence over (paid before) any dividend associated with common shares.
- Annuities: Annuities are contracts between investors and insurance companies that are typically used to pay out retirement income.
- Money Market Funds: Money market funds are low-risk, fixed-income-focused mutual funds that are often used as savings vehicles by consumers.
