How to use yields in investing

What are the different types of yields? 

You can use yields to find out your earnings realised on an investment, but it is crucial to remember that the yield you use depends on factors like the duration of the investment, and the security you invested in.  

Here are the types of yields commonly used for bonds, stock-based investments, and property investments.  

Yields on bonds 

Bonds are a popular yield-producing investment. Bond yields can be variable or fixed, and it’s important to remember that bond yields are always a percentage. 

There are different types of bond yield, each with unique elements. There is a nominal yield, which is a yield on bonds that pay annual interest, and the yield of floating interest rate bonds. Another way to determine bond yield is through the yield to maturity approach. 

Yields on stocks 

If you have invested in stocks, there are two main ways to calculate and classify yield. 

First, you can use the purchase price to calculate the yield. This is called a yield on cost, and you can calculate it by adding the price increase to the dividends paid by a company and then dividing that figure by the purchase price. 

For stock-based investments, you can also calculate the yield based on a market’s current valuation. You can call this the current yield. It is the most popular amongst investors. 

Because the calculation is similar to yield on cost, you are still adding the price increase with the dividend paid, but instead of dividing that figure by the purchase price, you are dividing it by the market’s current price. 

Yields on rental property 

If you own rental property and want to find out how much income you will generate, you can use the yield on rental property approach. Keep in mind that you can only use this method after you account for operating expenses. 

To find out the yield on a rental property, you will need to know your monthly net income, annual net income, and purchase price. 

What type of investor uses yields the most? 

A yield is a great way to find out where you stand with your investments, but it affects one type of investor more than others: income investors. Income investors are people who live off the income they generate through investing in securities like stocks. 

Let’s say you have a portfolio of dividend-paying stocks, and you want to use the earnings from this portfolio to pay for your living expenses. You would want to calculate the yield of these stock-based investments to see if you are earning enough through them to sustain your lifestyle. 

Risks and limitations 

As always, you want to consider the risks and limitations associated with yield. For example, a rising stock yield does not always mean that stock is a good investment. That is because rising yields tend to suggest a stock’s price is falling. 

Likewise, a high dividend yield can show trouble at a company. Because of this, you want to make sure you are looking at every aspect of a company before investing in it. 

Since yield depends on a range of factors, such as the investment security and the duration of the investment, you should use market insights and trading platforms to create a plan best suited to your investment portfolio. And continue to learn more about how you can calculate your investment earnings and better prepare for your future. 

Key takeaways 

• A yield represents the income you earn on an investment over a period of time. 
• It is expressed as a percentage and should not be confused with a return. 
• A return looks at gains and losses over a period of time, and it is expressed as a dollar value. 
• Return also looks at capital gain, but yield only looks at interest and dividends. 
• A yield can be known or anticipated, depending on your investment’s valuation. 
• Valuations can either be fixed or fluctuating. 
• There are different types of yields for stocks, bonds, and rental property. 
• Two commonly used yields for stock-based investments include yield on cost and current yield. 
• Yield of cost includes the purchase price in the calculation formula. 
• Current yield includes the market’s current price in the calculation formula. 
• Income investors use yield the most since they live off of the money they generate from their investments. 
• Yields have risks and limitations, and you should always do extensive research into a security. Try not to get caught up in rising stock yields and high dividend yields.