Do not confuse between the yield that a farmer expects from his field with the yield that an investor expects on his investment in share market. We are concerned with investments in a market, and this is where the concept of yield is mostly confused with another related concept return on investments. There are many who think that yield and return are one and the same and can be used interchangeably. This is totally wrong as will be clear after reading this article.
It is common for an investor to be worried about the choices of stocks in his portfolio. He is all the time concerned with the prospects or the performance of his chosen stocks. However, to be able to judge the performance of particular stocks in a better manner, it is necessary to be able to assess both yield as well as return. It is true that seasoned players take into account both yield, as well as return, while assessing the performance of different stocks.
Remember, return on investment is always about a time period in the past, and refers to amount earned by the investor that includes both interest and dividends along with capital gains that means rise in the prices of shares. This means that return is always an analysis of the past as to what a particular stock has given to an investor in a given time period.
Yield on the other hand, is forward looking, and is expectations from a stock. It measures interest and dividends that the stock is likely to earn in future but ignore capital gains. Dividends from shares and rents paid on a property are examples of yield. It is common to refer to blue chip companies shares as giving a better yield as these companies pay out higher dividends. Yield is calculated for a certain time period in future and then annualized assuming the rate of return to be same throughout a financial year.
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What is the difference between Yield and Return? • Return is backward looking and retrospective, whereas yield is forward looking and prospective. • The actual earning of an investor in the past in a given time period is called his return. • Return includes income from interest and dividends, also takes into account capital gains such as increase in share prices. • Yield is expected return on an investment in a given time period which is then annualized. • It certainly helps an investor to be able to calculate both return as well as yield to be able to assess the performance of a stock.
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