Yield vs. Return—Measuring Past and Future Performance of Investments
Updated · Aug 19, 2022
Before you make an investment, you need to evaluate the security’s past performance and try to predict future earnings. But the variety of measures out there can get confusing if you’re not an expert.
To help disentangle the mystery, we compare two of the key metrics—yield vs. return.
Read on to learn what each one measures and how to differentiate them.
What Is Return?
In finances, return is the amount gained or lost from an investment, business, or assets. Usually, it is expressed as a dollar amount. That said, you can also see it as a percentage.
We present the calculations further below.
We can measure the returns on a bond, ETF, stock—basically any type of investment. They can be positive (gain) or negative (loss).
Typically, the return is calculated on an annual basis. It is a backward-looking measure, meaning it indicates the past performance of securities.
There are several kinds of return—total, nominal, real, and so on.
Let’s see how they differ.
Types of Return
Nominal return is the amount without accounting for taxes and inflation.
Real return, in contrast, is the gain after taxes.
Both are expressed as a dollar amount.
The rate of return (RoR) is the earnings or losses expressed as a percentage of the initial cost of the investment.
You can calculate it with the following formula:
RoR = (Current value − Purchase value) / Purchase value ×100
The RoR can be nominal or real. On top of that, the calculation may include dividends and interest gains (added to the nominator).
Finally, the total return is the added RoR for several investments. You can use this measure to evaluate the gains or losses of a subset of or your entire portfolio.
What Is Yield?
In finance, yield refers to the earnings from an investment (including interest, dividends, and capital gains) expressed as a percentage of the purchase, current market, or face value.
Unlike return on investment, yield is a forward-looking measure. This means it indicates known or predicted future gains.
It applies only to certain types of investments—namely, those that pay interest and dividends. The most common ones are bond yields.
In addition, there are several types of yield depending on what they measure. The yield formula is slightly different for each type.
We examine some of the most frequently used ones.
Types of Yield
The yield on cost is the amount you receive in dividends per year divided by the purchase cost of the security.
The current yield is a measure of the earnings for a specified period. The current yield formula is the gains accumulated from interest and dividends divided by the current market price of the security.
In contrast, yield to maturity indicates what you’ll gain if you hold a bond until maturity. In other words, it is the total gain from a fixed-rate investment until the principal is paid back.
The next types of yields explained apply to bond investments.
Nominal bond yields are also known as coupon rates. That is the fixed interest rate paid on a security. You can calculate it by dividing the interest earned by the bond’s face value. It applies to the entire life of the security.
Last but not least, yield to worst is an estimate of the lowest possible earnings you could get from a bond. That is, if you redeem the bond before it reaches maturity.
Yield vs. Return
Yield and return are both measures of the performance of different types of securities.
They are indeed very similar.
In fact, in some ways, the variation between the different types of yields and returns is greater than the difference between the two concepts.
Still, there are some key distinctions.
Let’s see what these differences mean in practice.
Yield vs. Return—Practical Applications
You can use annualized returns to compare the performance of different stocks for a period of one year.
A holding period return, on the other hand, will show you the total amount you’ve gained or lost from a given investment.
The definition of yield in economics is the amount a business pays in dividends and interest to investors. As such, it can tell you a lot about a company's performance.
An increase in the yield could mean several things.
The company is paying bigger dividends because its earnings have increased. In this case, the high yield would indicate a growing stock value.
If, however, the dividends are increasing, but the company’s earnings aren’t, you can expect a cash flow issue shortly after.
The yield vs. return difference is subtle but key.
They measure different aspects of the real and potential earnings of securities. You should use both for the most accurate evaluation of an investment’s past and future performance.
To be able to read them, you need to understand what each one indicates. Our article can guide you through this process.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.