As you evaluate various investment choices, yield, return, and total return are essential considerations. Although the concepts are fairly straightforward, there can be some confusion. Here is a quick overview.
For any asset, yield is the income earned (interest or dividends) divided by the price of the asset, such as a bond or a share of stock. Price and yield move in opposite directions.
- If a $100 bond earns 5 percent interest, it earns $5 on a $100 asset, or $5 divided by $100, which is a 5 percent yield. If the price of the bond increases to $105, the yield declines to $5 on a $105 asset, or 4.8 percent.
| $5 ÷ $100 = 5.0% | and | $5 ÷ $105 = 4.8% |
- If a share of stock is worth $50 and pays a $1 dividend per share, the yield is $1 divided by $50, or 2 percent. If a company increases its dividend, then the yield will also change. Raising the dividend to $1.10 results in a 2.2 percent yield.
| $1 ÷ $50 = 2.0% | and | $1.10 ÷ $50 = 2.2% |
Total return is the combination of yield and the change in valuation. Total return takes into account the income earned on an investment, such as interest or dividends, and any appreciation or depreciation in the value of the asset. If a stock earns a 2 percent dividend yield and appreciates 5 percent in a year, the total return is 7 percent.
| 2% dividend yield | + 5% appreciation | = 7% total return |
