What is Yield?

Do you ever feel frustrated when you don’t fully understand something other people seem to ‘get’? It annoys you but doesn’t annoy you enough to stop and get it sorted. It’s a bit like one of those odd jobs around the house, it’s not hard but for some reason it doesn’t get done. Weird isn’t it. (Not that there’s anything wrong with weirdness. I think it’s normal).

 

Well, I reckon one of those annoyances for many investors is yield.

 

Yield is nothing more than a percentage return on an investment, usually referring to income. E.g. If you are getting 4% for a term deposit then the yield is 4%. (Usually measured in pre tax dollars).

 

Rarely does yield refer to capital gain unless specified (e.g. when a stock goes from $20 to $25).

 

Broadly speaking, there are four different types of yield – dividend yield (shares), rental yield (property), bond yield, bond rates or coupon rates (bonds) and interest (cash or term deposits).

 

Yield is important because it enables you to compare the income return between individual assets (E.g. CBA vs NAB shares) or asset classes (E.g. shares vs property).

 

Example

 

CBA shares are valued at $77.00 and pay a dividend of $3.64. Yield = 4.72%

 

Investment property is valued at $500,000 and receives rental income of $450pw ($23,400pa). Yield = 4.68%

 

Yield also has an inverse relationship with price. E.g. if the CBA shares fell in price, the yield would go up because you would receive the same dividend ($3.64) but at a lower purchase price (however you must buy at a lower price to get the higher yield). Or if you were able to buy the above property at $450,000 instead of $500,000, your rental yield would increase to 5.2%.

 

The Catch

 

Without getting bogged down in numbers there is one basic premise you need to understand. Dividend income from shares is usually paid out in after tax dollars while rental income from property is received in pre tax dollars.

 

Therefore, when comparing different asset classes such as shares vs property, it is important to compare yields on a gross income basis (pre tax) so you can compare apples with apples.  When you do this, it is not uncommon for shares to look better than property, or property to look less attractive than shares in after tax dollars. Horses for courses.

 

With regards to the CBA shares, if you ‘grossed up’ the dividend to compare it with property on a pre tax basis, its yield increases from 4.72% to 6.75%. Not bad!

 

Pensioners Win

 

The above example demonstrates one reason why shares are a better investment inside super than property once a superannuant moves into pension stage. Because shares pay out after tax dividends they receive a ‘tax return’ which increases their yield, but only if the shares are inside super.

Hope this makes sense. If it has annoyed you further, please feel free to contact us and vent your ‘annoyance’. It’s not weird, it’s normal. Just don’t yield to it.