What is yield and why do investors need to pay attention to this?

In investing, the term “Yield” is often mentioned frequently. However, many novice investors do not fully understand what it truly means and why it is important for investment decisions. This article will explore Yield in detail to give you a clear foundational knowledge that you can apply practically.

Yield is the return on investment, not the profit from trading

Most beginners confuse Yield with Return; these two terms have different meanings.

Yield refers to the expected periodic return from holding an asset, regardless of price changes. Yield comes from sources such as dividends, interest, or rental income.

In contrast, Return is the total actual gain you receive, which includes Yield plus any profit or loss from price fluctuations of the asset.

For clarity, here are some examples:

• If you buy a stock at 100 THB and receive 5 THB in dividends per year, then Yield = 5%
• But if the stock price increases to 120 THB, your total return (Return) will be higher than 5% because it includes both dividends and capital gains.

How to calculate practical Yield

Basic formula:

Yield = (Annual income / Current price) × 100%

The calculation of Yield varies depending on the asset type:

1. Dividend Yield from stocks

Calculated by dividing dividends per share by the stock price.

Example: Company X pays 8 THB dividend per share, with a current market price of 160 THB

• Dividend Yield = (8 / 160) × 100 = 5%

This means if you invest 160 THB, you will earn 5% annually from dividends.

2. Bond Yield from debt securities

Bonds have purchase prices and interest rates.

Example: Buy a bond worth 1,000 THB with an interest rate of 4% per year

• Bond Yield = (40 / 1,000) × 100 = 4%

3. Earnings Yield from company profits

Calculated by dividing net profit per share by the stock price.

Example: Company Y has a net profit of 6 THB per share, with a stock price of 120 THB

• Earnings Yield = (6 / 120) × 100 = 5%

4. Mutual Funds Yield from the fund

Includes dividends from stocks and interest from bonds within the portfolio.

Example: The fund generates total income of 120 THB with a net asset value of 1,200 THB

• Yield = (120 / 1,200) × 100 = 10%

Factors that determine the Yield of an investment

Risk level

High-risk investments typically require higher Yield to compensate for risk, such as startup tech stocks often offering higher Yield than government bonds.

Economic and market conditions

Central bank interest rates, economic health, and political risks all influence the Yield an investment can generate.

Investment horizon

Generally, long-term investments (5-10 years) tend to accumulate higher yields over time.

Company policies

Dividend payout policies, investments in R&D, or business expansion plans affect future Yield.

Asset type

Debt instruments usually offer predictable Yield levels. Commodities like (gold) tend to have lower Yield but also lower risk.

Comparing yields across different asset classes

Stocks (Stock Yield)

• Dividend Yield: Income from dividends, generally 2-6% for stable stocks.
• Earnings Yield: Income from profits, often higher than Dividend Yield.
• Advantages: Potential for high long-term returns.
• Disadvantages: Higher risk, price volatility.

Bonds and fixed-income (Bond Yield)

• Range: Usually 2-5%, depending on issuer credibility.
• Advantages: Predictable Yield, low risk.
• Disadvantages: Lower returns, susceptible to inflation eroding real income.

Real estate (Real Estate Yield)

• Rental Yield: Typically 3-8%, depending on location and property type.
• Advantages: Relatively steady returns, potential appreciation.
• Disadvantages: Requires significant initial capital, maintenance costs.

Mutual Funds (Mutual Funds Yield)

• Range: Varies widely, 2-12%, depending on investment strategy.
• Advantages: Managed by professionals, diversification.
• Disadvantages: Management fees apply.

Cryptocurrencies (Crypto Yield)

• Range: Very high, sometimes 5-20% or more.
• Advantages: Potential for high returns.
• Disadvantages: Very high risk, market volatility.

Who should consider high-yield investments

Choosing the appropriate Yield depends on your personal situation:

If you need regular income: Opt for assets with steady Dividend Yield or Bond Yield, such as blue-chip stocks or government bonds.

If you are still studying and can tolerate risk: Invest in growth stocks or mutual funds, which have lower Yield but higher potential capital gains.

If you are preparing for retirement: Combine bonds (for stability) and dividend stocks (for income and growth).

If you enjoy risk: Assets with high Yield, such as tech stocks or cryptocurrencies, but manage your funds carefully.

Key points to remember

1. Yield is not total return: Yield is regular income, but total Return includes capital gains or losses.

2. High Yield equals high risk: Nothing is free; if Yield seems too high, check for hidden risks.

3. Past Yield does not guarantee future performance: Business changes, company policies, and market conditions can cause Yield to decline.

4. Research before investing: Read annual reports, follow industry news, and understand factors influencing Yield.

Summary

Yield is a fundamental concept in investing that helps you assess how your capital generates regular income. Whether investing in stocks, bonds, real estate, or mutual funds, understanding and comparing the Yield of different assets will help you build a balanced portfolio that balances current income and future growth. Remember, high Yield often comes with higher risk, so prioritize education and diversification.