What is Yield and why is it necessary for investors to understand how to calculate Yield?

When it comes to Yield or translating Yield in Thai, it is “อัตราผลตอบแทน,” which is a key indicator that shows how much return our investment will generate over a specified period. Many people often confuse Yield with Return, even though both are related to investment returns.

Basic Differences: Yield vs Return

Before diving deeper, the first thing to understand is Yield refers to the expected return from an investment, excluding changes in asset prices, such as dividends or interest paid regularly.

While Return is the total actual return received, including dividends, interest, and profit or loss from price changes when selling the asset.

Simple example: If you buy shares at 100 baht and receive 5 baht in dividends (this is Yield), but if the share price increases to 120 baht, your return will be (5 + 20) / 100 = 25%.

What is Yield and How to Calculate It

Yield is a number representing the expected return from various assets, including stocks, bonds, mutual funds, or other assets. It is usually expressed as a percentage per year.

Basic formula for Yield:

Yield = ((Current Price – Purchase Price) / Purchase Price) × 100%

However, the calculation of Yield varies depending on the type of asset invested in.

Types of Yield Investors Need to Know

1. Dividend Yield: Return from dividends

When you hold shares in a company that makes a profit, the company may decide to distribute dividends. Dividend Yield is calculated by dividing the dividend paid per share by the current share price, then multiplying by 100%.

Example: Company ABC pays a dividend of 10 baht per share, and the current market price is 100 baht. Therefore, Dividend Yield = (10 / 100) × 100% = 10%.

This means if you invest in this stock, you will get a 10% return from dividends in one year.

2. Earnings Yield: Return from company profits

Besides dividends, Earnings Yield is another way to measure return from holding stocks, calculated by dividing net profit per share (EPS) by the current share price.

Example: Company XYZ has a net profit per share of 5 baht, and the current share price is 50 baht. Earnings Yield = (5 / 50) × 100% = 10%.

This means for every baht you invest in this stock, the company is generating a 10% profit annually.

3. Bond Yield: Return from bonds

When investing in bonds, the issuer pays interest regularly. Bond Yield is calculated by dividing the annual interest received by the current market price of the bond.

Example: You buy a bond with a face value of 1,000 baht, with an interest rate of 5% per year. Bond Yield = (50 / 1,000) × 100% = 5%.

This means you will receive 50 baht in interest annually from a 1,000 baht investment.

4. Stock Yield: Overall return rate of stocks

Stock Yield is a comprehensive measure of the total return that shareholders will receive, combining Dividend Yield and Earnings Yield.

5. Mutual Funds Yield: Return from mutual funds

Mutual funds generate income from two sources: dividends from invested stocks and interest from debt securities.

Example: Fund A has total income of 100 baht and a net asset value of 1,000 baht. Mutual Funds Yield = (100 / 1,000) × 100% = 10%.

Factors Affecting Yield

Asset Type

The type of investment influences the Yield rate. Generally, investing in debt instruments tends to have lower Yield but also lower risk. Conversely, stocks or other assets usually have higher Yield but also higher risk.

Market Conditions

Interest rates set by banks, economic conditions, and other market factors all affect the expected Yield. During periods of high interest rates, the Yield of some assets tends to increase.

Investment Duration

Longer investment periods often correlate with higher Yield due to compound interest calculations.

Risk Level

High-risk investments typically require higher Yield to compensate for the increased risk.

Company Management Policies

Dividend payout policies, investment in R&D, or other financial policies of a company influence the Yield of its stocks.

Which Asset Class Offers the Highest Returns

There is no “most correct” answer because it depends on individual circumstances and investment objectives.

Stocks: Offer high returns over the long term but come with high risk. Suitable for those with a long investment horizon and acceptance of price volatility.

Real Estate: Provides high long-term returns, moderate risk, but requires large capital investment.

Bonds: Offer moderate returns with low risk, suitable for investors seeking stability.

Gold: Provides moderate returns with low risk, good for diversification.

Cryptocurrencies: Offer very high returns but also very high risk, suitable for knowledgeable and market-savvy investors.

How to Compare Yield for Investment Decisions

When choosing assets to invest in, start by comparing the yields of different assets within a comparable range. For example, compare the Dividend Yield of different stocks or Bond Yields of various bonds.

However, relying solely on Yield is not enough; risk, investment horizon, and personal objectives must also be considered.

Summary

Yield is a crucial concept in investing that helps you understand and measure your investment returns. Knowing what Yield is, how to calculate it, and the different types of Yield will enable you to make smarter investment decisions.

Remember, higher investment returns based solely on Yield require consideration of risk, duration, and your financial goals. With a good understanding of Yield, you can build a balanced portfolio that appropriately balances returns and risks.