Yield: Basic understanding for investors - How to calculate it correctly

In investing, investors need to understand the fundamental concept of measuring returns. One of the most important analytical tools is Yield or “Rate of Return,” which is an indicator that helps investors accurately assess the performance of their investments. This article will present comprehensive content so that beginners in the investment industry can apply this knowledge to make informed investment decisions wisely.

What factors influence Yield?

Before understanding how to calculate Yield, it is essential to know which factors influence this rate of return.

Nature of the investment

The type of asset chosen directly impacts the expected Yield. Debt instruments such as bonds typically offer stable and lower returns, while stocks present opportunities for higher returns but with increased risk.

Market conditions

Economic and financial conditions broadly influence Yield. Factors such as interest rate policies from financial institutions, economic status, and political risks can significantly alter the Yield.

Investment duration

Longer periods often give investors the chance to see higher returns. Compound interest is a key factor that increases Yield over time.

Acceptable risk level

High-risk investments need higher Yield to compensate for potential losses. This is a fundamental principle of investing: high risk = high return.

Institutional policies

Asset management and investment decisions by companies or agencies affect Yield determination, such as profit distribution to shareholders, large-scale project investments, or technological development.

What does Yield mean, and how is it calculated?

Definition of Yield

Yield or “Rate of Return” is a number that indicates the benefits an investor will receive from investing in an asset within a specified period. This figure is often expressed as a percentage per year. Yield has various forms depending on the type of asset invested.

Yield calculation formula

For debt investments such as bonds, the basic formula is:

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

This formula is useful for measuring the actual return from asset price changes.

Examples of different types of Yield

• Stock Yield: Refers to the dividends received by shareholders from holding the company’s stock.
• Bond Yield: Represents the interest income collected by investors from holding bonds.
• Real Estate Yield: Income derived from rental payments received by property owners.

Comparing the Yield of different asset types helps investors see the overall picture and select assets aligned with their goals and risk tolerance.

Common types of Yield

Dividend Yield - Return from dividends

Dividend Yield is calculated from the ratio of dividends received to the current stock price. This figure indicates a stock’s ability to generate income for shareholders.

Example: Company X pays an annual dividend of 15 THB, with the current market stock price at 150 THB.

Dividend Yield = (15 / 150) × 100 = 10%

This means investors will receive a 10% return from dividends annually.

Stock Yield - Return from net profit

Stock Yield reflects the rate of return shareholders receive from the company’s profit, calculated from net profit per share divided by the current stock price.

Example: Company Y has a net profit per share of 8 THB, with the current stock price at 80 THB.

Stock Yield = (8 / 80) × 100 = 10%

Investors understand that net profit relates to a 10% stock price.

Bond Yield - Return from debt instruments

Bond Yield indicates the absolute return from investing in bonds, expressed as a percentage per year. It is a crucial indicator for income-focused investors.

Example: An investor purchases a bond worth 1,000 THB with an interest rate of 4% over 10 years.

Bond Yield = (40 / 1,000) × 100 = 4%

The investor thus receives 4% interest annually.

Mutual Funds Yield - Return from mutual funds

Mutual Funds Yield is calculated from the total income of the fund ((dividends from stocks and interest from debt instruments)) divided by the net asset value of the fund.

Example: Fund B has total income of 120 THB, with a net asset value of 1,200 THB.

Mutual Funds Yield = (120 / 1,200) × 100 = 10%

Investors in this mutual fund will receive a 10% return.

Yield in the stock market - An in-depth perspective

Dividend Yield

Dividend Yield is calculated by dividing the total dividends paid to shareholders during the year by the current stock price, then multiplying by 100%.

For example, if a stock’s current price is 200 THB and it pays a total dividend of 10 THB during the year, the Dividend Yield will be (10 / 200) × 100% = 5%.

Earnings Yield

Earnings Yield is calculated from net profit per share divided by the current stock price, where Earnings per Share is net profit per share, and the current price is the trading price on the stock exchange.

Understanding Stock Yield helps investors assess whether a stock’s price is reasonable relative to its earnings and aids in making rational investment decisions.

Yield vs Return - The key difference to know

Yield and Return are related terms but have distinct meanings and calculations.

• Yield refers to the expected rate of return from an investment under normal circumstances, not considering changes in asset prices.
• Return refers to the actual outcome, including dividends/interest and gains/losses from price changes.

Comparison table

Which asset class offers the highest returns?

High returns are often accompanied by high risks. The following asset classes tend to have these characteristics:

Stocks

Stocks have the potential to deliver high long-term returns but carry high short-term risks. Suitable for investors with a long investment horizon, such as technology or growth stocks.

Real estate

Real estate offers good long-term returns, especially in high-demand markets. However, one must consider maintenance costs, management fees, and market volatility.

Mutual funds

Mutual funds vary in type and returns. Some offer high yields, while others focus on safety. This option is suitable for investors seeking diversification.

Gold

Gold is often viewed as a safe asset, providing moderate returns with low risk. It is a key component in portfolio diversification.

Cryptocurrencies

Cryptocurrencies have the potential for very high returns but also come with very high risks. Suitable for investors who understand the market and can tolerate volatility.

Summary

Yield is a vital tool that helps investors understand and evaluate investment performance systematically. Whether investing in stocks, debt instruments, real estate, or mutual funds, calculating and comparing Yield provides a comprehensive view of expected returns.

The true meaning of Yield is to make investors’ capital work efficiently, generating returns proportional to the invested amount. Whether choosing high-yield assets or diversifying across various asset classes, investors must consider their risk appetite and investment horizon to ensure effective investments and achieve financial goals.