When referring to the yield on an investment, this indicates the earnings generated over a certain period of time. It is generally presented in percentage form and includes the interest or dividends relevant to the initial investment.
While returns are calculated using the difference in value at two specific points in time, the yield will calculate the total (net) value earned over a period of time. This provides an invaluable tool in helping you understand the potential value of an investment.
Basic yield is calculated as the net realised return divided by the initial investment amount. For example, if an investor bought $100 worth of Bitcoin which grew to $2,000 in the next year, then the formula would look like this:
$1,900 / $100 = 19
-> which translates to 1900%.
There are several different formulas based on the type of yield you wish to calculate. These include:
- Yield on Stocks
- Yield on Bonds
- Yield to Maturity
- Yield to Worst
- Yield to Call
A high yield isn’t necessarily a good thing. Should the market’s decline or the company pays out high dividends the yield will still reflect as high. Always do your own research when considering an investment, or trust a financial advisor.