Yield represents the earnings generated by an investment over a specific period, typically expressed as a percentage. Return, on the other hand, indicates the overall profit or loss of an investment over time, measured by the change in its dollar value. Yield is prospective, while return is retrospective in nature.
More often than not, yield and total return are used interchangeably. Typically, these terms refer to what an investor will make from a fixed investment like bonds. But it is important to remember that these two terms constitute different meanings. All investors, especially those who have put their money in bonds, should learn about yield and total return to make informed decisions regarding their wealth.
In this article, we will learn what yield and total return mean, alongside their various differences.
What is yield?
Simply put, yield is the return on the investment. Dividends or interests come under this category, which are derived from a security. Often, these are conveyed via an yearly percentage figure derived from the cost of investment and its prevailing market or face value.
In essence, yield tells you how much income the investment has provided without considering the principal. However, in some cases, this might not be necessarily true. For instance, CEF (closed-end funds) will utilise the returns from the investor’s principal to maintain the distributions at intended levels. CEF investors should be cognisant of whether their funds are involved in such practices and their possible consequences.
Usually, investors determined on yield seek to retain the principal and want this principal to produce income. Growth is typically viewed as an ancillary consideration of investment, particularly for fixed-income instruments such as bonds, CDs, and depository accounts.
Stocks that pay dividends have become popular for their yields on corporate earnings, which in several instances are more than a regular fixed-income investment.
What is the total return?
Interest, dividends, capital gains, and distributions that are realised over a period are known as total return. Simply put, an investment or portfolio’s total return comprises income as well as appreciation.
Total return could take into account the dividend-adjusted return as well. This dividend-adjusted return is computed by investors by adding the dividend total received while they held the company stock to the amount they earned when they sold the stock.
Unlike investors seeking yield, total return investors prioritise portfolio growth. They take distributions when required from the amalgamation of the income generated from the yield on multiple holdings and the value appreciation of specific assets. While total return investors do not want to see their portfolio’s overall value decrease, capital preservation is not their primary investment goal.
Yield vs Total return - What is the difference?
Now that we have understood the meaning of yield and total return, it is now evident why some may use these terms interchangeably (erroneously so). In this section, we will discuss various distinctions between total return and yield to strengthen your basics.
- While yield represents the income generated on the investment, total return refers to what an investor has gained or lost on a particular investment.
- A percentage figure is used to express yield, while the return is provided in rupees.
- A yield is a forward-looking assessment and indicates what an investor can gain or lose on an investment. A yield considers the current market and face value but does not weigh capital gains. Its percentage is often expressed with an APR (annual percentage rate). And as it rings true for any investment, the riskier the asset, the higher will be the potential yield.
- On the other hand, the total return on an investment is focused on the rupee amount of what an investment has previously earned. It emphasises on paid dividends, yearly payments made to investors by the organisation. Plus, it factors in the capital gains (short-term and long-term) which enhances the asset’s value.
- Remember that yield is not the same as the rate of return. Both are expressed in percentages and predict the investment’s return over a period of time. However, the yield does not consider capital gains like the rate of return does.
Yield vs Total returns with example
Let’s understand how yield and total returns work with an example.
Suppose ‘XYZ’ company pays its shareholders a quarterly dividend of Rs. 2 and the stock price is Rs. 100, and the annual dividend is expressed as 8%. If the stock price doubles to Rs. 200, and if the dividend remains unchanged, then the yield is reduced to 4%.
Assume you have invested Rs. 1,000 in ABC company’s stock. The stock price soars and is currently worth Rs. 1,200. In the same year, you also receive an annual dividend of Rs. 100. This means that you have made gains of Rs. 300 (total) on your investment, i.e., a total return of 30%.
Which is more important?
The importance of total return versus dividend yield depends on an investor’s goals and investment approach. If your objective is to compare how different stocks have performed over a specific period, total return provides a more comprehensive measure, as it includes both price appreciation and dividends.
On the other hand, if you depend on your investments for regular income, dividend yield becomes more relevant, as it reflects the cash income generated from the investment. For investors with a long-term horizon who plan to stay invested for many years, focusing on total return generally makes more sense, as long-term wealth creation is driven by overall growth.
That said, investment decisions should not be based solely on these two metrics. A thorough evaluation should also include analysis of the company’s balance sheet, income statement, cash flows and broader business fundamentals.
Do you need a good dividend yield to make a good total return?
A high dividend yield is not essential to achieve a good total return, but it can be one of several contributing factors. Total return represents the overall gain from an investment, combining price appreciation and dividend income. While dividends add to returns, strong capital growth alone can also deliver attractive total returns.
Many growth-oriented companies reinvest profits back into the business instead of paying high dividends. These companies may offer low or no dividend yield, yet generate strong total returns through rising share prices over time. For long-term investors, compounding price appreciation often plays a larger role in wealth creation than dividends.
That said, dividend yield can enhance total return, especially in stable or mature companies. Regular dividends provide consistent cash flows, which can be reinvested to benefit from compounding or used as income. In volatile or sideways markets, dividends can cushion returns when price growth is limited.
Ultimately, a good total return depends on the balance between growth and income, along with factors such as business fundamentals, market conditions and investment horizon. Investors should evaluate dividend yield in context rather than viewing it as a standalone indicator of potential performance.
Which is better - Yield or Total return?
If you are expecting your investments to generate regular income, then yield-oriented stocks are a good place to start. However, if you emphasise long-term investment growth and are going to actively invest in capital markets for a substantial period, then it is wise to choose stocks that have the potential to provide lucrative total returns.
Key takeaways
- Yield is referred to as the income return on an investment, which is dividends or interest received and is expressed in the form of an annual percentage depending on the cost of investment and its current market or face value.
- Dividends, interest, capital gains, and distributions realised in a period of time is known as a total return.
- Investors who emphasise on yield are usually interested in making an income and are less inclined to growth. Therefore, they might put their funds in investments like bonds and CDs.
- Investors who focus on total returns are more concerned with the growth of their portfolios and other related investments.
Summary
It is important to understand the differences between yield and total returns as they are a part of two distinctive financial approaches. While yield is all about receiving consistent income, total returns are about long-term growth. Your decision to invest in yield-based or return-based investment should be based on your financial circumstances and future fiscal goals. The good part is that you do not have to be conservative in your approach and invest in both to generate income and amplify growth. If you are unsure what path suits you the best, consider seeking the assistance of a financial advisor who could guide you with a customised investment plan.
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