Understanding yield vs. return

March 05, 2020

Knowing the differences between yield and return can help you evaluate an investment’s income potential.

 

Yield and return are both measurements of an investment’s performance. Here's a look at how they’re different and how you can use them to track the performance of your investments.

 

What is yield?


Yield refers to how much income an investment generates, separate from the principal. It’s commonly used to refer to interest payments an investor receives on a bond or dividend payments on a stock.

Yield is often expressed as a percentage, based on either the investment’s market value or purchase price. For example, let's say bond A has a $1,000 face value and pays a semiannual coupon of $10. Over one year, bond A yields $20, or 2%. This is known as the cost yield because it’s based on the cost or value of the bond.

However, most people buy bonds on the secondary market and not directly from the issuer, meaning they pay more or less than face value. If you're considering purchasing the same bond A for $900, the $20 coupon payments based on the current $900 price would be a yield of 2.2%. This is known as the current yield because it’s based on the current price of the bond.

Yield is also a commonly used term when discussing dividend stocks. For example, let's say you purchase 100 shares of XYZ for $50 ($5,000 total). Each quarter, XYZ pays a dividend of 50 cents per share. Over a year, you would receive $200 in dividend income (50 cents x 4 quarters = $2 x 100 shares). Your initial investment of $5,000 yielded 4% ($200 / $5,000 x 100).

 

What is return on investment?


Of course, it’s likely that XYZ’s share price changed over that same time, which is where return can be helpful. Return is a measure of an investment’s total interest, dividends and capital gains, expressed as a financial gain or loss over a specific timeframe.

Return provides a glimpse of the investment’s prior performance and helps determine if a particular investment has been profitable over time. If stock XYZ ended the year at $55 per share, your total return would be equal to the increase in share price plus the dividends, or $700 ($5 + $2 = $7 x 100 shares). That same $5,000 investment returned 14% ($700 / $5,000 x 100). 

 

Using yield and return together


Yield and return should be used together to help you evaluate an investment’s overall performance. 

Consider the earlier example of stock XYZ. Let’s say XYZ shares lost value over the year and are now valued at $45 each. The total return for that investment would be negative; you would have lost $300, or 6% ($200 in dividends – $500 in principal). However, the yield didn’t change. You still received $200 in dividend income.

Investing in stocks based on their yield could prevent you from having to sell shares to generate income. In a market downturn, this can help you avoid selling shares at a loss. 

Return can be used to assess not only individual investments or an entire portfolio. Doing so can help determine the overall performance and pinpoint whether certain underperforming investments should be sold, and the money reinvested elsewhere.

 

The risk factor


Risk is an important consideration for an investment’s yield because high-yield investments may carry more risk.

As an example, let's say company B wants to sell bonds. If investors think company B is at risk of missing coupon payments and/or going bankrupt, the company likely needs to pay a higher yield on those bonds to compensate for the risk. To assess the risk of a bond in comparison to its yield, investors often look at the bond’s rating. It’s no surprise that the lowest-rated debt often has the highest yield. In fact, the term “high-yield” and “junk” are often used interchangeably when discussing poorly rated debt.

With stocks, if a company is paying high dividends, it may not be reinvesting in the company and growth, which could jeopardize the investment long term. It’s important to look at how the dividend payments fit into the company’s overall financials. If, for example, the company consistently reports negative earnings (i.e., losing money) but is still paying dividends, it may be tapping into cash on hand or other sources to afford those payments. This could signal long-term problems or even future elimination of dividends.

 

You should consider your investment goals and tolerance for risk when determining if an investment is the right fit for your portfolio. And once you’re ready to pull income from your investments, consider making an appointment with a financial professional to assess your goals and help make sure your withdrawal plans are aligned with your investment objectives. 

 

Diversification is a key part of managing investment risk. Read about 7 diversification strategies for your investment portfolio

 

Related content

How grandparents can contribute to college funds instead of buying gifts

Retirement planning strategies for dual-income families

6 common money mistakes to avoid

5 times you may need a financial advisor

How do interest rates affect investments?

Effects of inflation on investments

How to use debt to build wealth

4 benefits of independent loan agents

7 year-end tax planning tips

The connection between your health and financial well-being

The unsung heroes of exchange-traded funds

What type of investor are you?

Retirement expectations quiz

Key considerations for launching an ILP

How to open and invest in a 529 plan

Do your investments match your financial goals?

Understanding yield vs. return

Should rising interest rates change your financial priorities?

Saving vs. investing: What's the difference?

What types of agency accounts are available for investors?

Retirement income planning: 4 steps to take

LGBTQ+ retirement planning: What you need to know

Your 4-step guide to financial planning

How to start investing to build wealth

How much money do I need to start investing?

Can fantasy football make you a better investor?

Investment strategies by age

Investing for beginners

Bull and bear markets: What do they mean for you?

A guide to tax diversification in investing

7 diversification strategies for your investment portfolio

How to manage your money: 6 steps to take

Avoid these 6 common mistakes investors make

4 strategies for coping with market volatility

5 questions to help you determine your investment risk tolerance

Key components of a financial plan

4 tips to help you save for retirement in your 20s

4 times to consider rebalancing your portfolio

4 major asset classes explained

What are alternative investments?

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

How you can take advantage of low mortgage rates

4 questions to ask before you buy an investment property

Employee benefit plan management: Trustee vs. custodian

Renewing your custody contracts? Negotiate the fees.

Private equity and the full-service administrator

Capitalizing on growth in the private equity space

How liquid asset secured financing helps with cash flow

Rule 18f-4: An in-depth look at the derivative risk management program and value-at-risk

Rule 18f-4: The limited use exception

Rule 18f-4 overview: Regulatory framework changes for derivatives

Can you take advantage of the dead equity in your home?

Investing in capital expenditures: What to discuss with key partners

Interval funds find growing popularity

ESG-focused investing: A closer look at the disclosure regulation

4 questions you should ask about your custodian

OCIO: An expanding trend in the investment industry

At your service: Outsourcing loan agency work

3 questions to ask your equity, quant and CTA fund administrator

A first look at the new fund of funds rule

Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank | U.S. Bancorp Investments is the marketing logo for U.S. Bank and its affiliate U.S. Bancorp Investments.

The information provided represents the opinion of U.S. Bank and U.S. Bancorp Investments and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank, U.S. Bancorp Investments and their representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

For U.S. Bank:

U.S. Bank does not offer insurance products but may refer you to an affiliated or third party insurance provider.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.

For U.S. Bancorp Investments:

Investment and insurance products and services including annuities are available through U.S. Bancorp Investments, the marketing name for U.S. Bancorp Investments, Inc., member FINRA and SIPC, an investment adviser and a brokerage subsidiary of U.S. Bancorp and affiliate of U.S. Bank.

U.S. Bancorp Investments is registered with the Securities and Exchange Commission as both a broker-dealer and an investment adviser. To understand how brokerage and investment advisory services and fees differ, the Client Relationship Summary and Regulation Best Interest Disclosure are available for you to review.

Insurance products are available through various affiliated non-bank insurance agencies, which are U.S. Bancorp subsidiaries. Products may not be available in all states. CA Insurance License #0E24641.

Pursuant to the Securities Exchange Act of 1934, U.S. Bancorp Investments must provide clients with certain financial information. The U.S. Bancorp Investments Statement of Financial Condition is available for you to review, print and download.

The Financial Industry Regulatory Authority (FINRA) Rule 2267 provides for BrokerCheck to allow investors to learn about the professional background, business practices, and conduct of FINRA member firms or their brokers. To request such information, contact FINRA toll-free at 1-800‐289‐9999 or via https://brokercheck.finra.org. An investor brochure describing BrokerCheck is also available through FINRA.

U.S. Bancorp Investments Order Processing Information.