What is yield?
Yield is a way to measure the return from an investment, which makes it easier to compare different investment opportunities typically expressed as a percentage. For example, if you invest £1000 and make £50, your investment has a 5% yield. This is usually calculated on an annual basis, but may also be calculated quarterly or monthly.
What is the difference between gross and net yield?
Gross is the return before any expenses are deducted. Net is the return minus fees, taxes, and any other expenses. For example, an investment property might generate a yield of 10%, but when costs are deducted, such as letting agent fees, taxes, and repairs, it drops to 3%.
It is important to distinguish between the two when deciding whether an investment is right for you.
How is this calculated in the stock market?
Yield returns in the stock market can refer to a price rise for a particular stock. It may also be in respect of dividends paid on shares.
The different types
There are two types:
- A historic or trailing yield is past investment returns.
- A prospective yield is the predicted return from an investment.
What factors can affect a bond investment?
Several factors can impact the yield of a bond investment.
Firstly, the creditworthiness of the issuer affects the risk associated with the bond investment. If the issuer has a lower credit rating, they may default on the bond, resulting in a higher yield to compensate for the risk.
Longer-term bonds typically offer higher yields due to the additional time risk, inflation risk, and interest rate risk.
Inflation is another key factor. Higher expected inflation can lead to higher yields to account for the reduced purchasing power of future interest payments.
Finally, current market interest rates can also have impact. If interest rates rise, bond yields offered by already issued bonds will typically rise to compensate for the increased opportunity cost of holding fixed income assets.
What is a good yield for an investment and how does it vary across different asset classes?
The yield on various asset classes such as stocks, bonds, and real estate can vary widely.
For stocks, a good yield is typically seen as 2-4% and can be achieved through dividend payments.
A good yield for bonds can range from 2% to 6% or higher.
In real estate, a good yield can vary depending on the type of investment. For example, real estate investment trusts (REITs) typically offer yields around 4-6%, while rental properties may offer upwards of 8% or more.
What is the yield curve?
This looks at how an investment performs over time. Economic outlook can also affect a yield curve.
There are three main types:
- Normal – Here, the curve starts low but trends upwards over time.
- Inverted – An investment with an inverted yield curve generates higher returns in the short-term.
- Flat – A flat yield curve can sometimes be an indicator of recession.
How does the yield of a corporate bond differ from that of a treasury bond?
A corporate bond differs from that of a treasury bond in several ways. Corporate bonds typically have higher yields as compared to government-issued bonds as they are considered riskier. Secondly, the coupon rates for corporate bonds are higher than that of treasury bonds to compensate investors for the additional risk. Finally, the yield of a corporate bond is affected by the credit rating of the company issuing the bond. If a corporate bond is rated AAA, it will generally have a lower yield compared to a bond rated B due to the differences in creditworthiness between the issuers.
It is important to remember that yields can be variable and are never guaranteed, whatever the asset class.
