Definition of Yield
Yield is the income you receive from your investment. The income can come in many forms, such as dividends or interest or, in the case of real estate, through rental income. Quite often it’s expressed as an annual percentage rate, which is based on the initial cost as well as the current market value of the investment.
Why is this term important?
The yield is a forward-looking record of your return on an investment. It measures income, such as rental income, interest or dividends, but ignores capital gains. When measuring yield, the income from the investment is taken from a specific time period and then annualized. That means the yield of an investment is based on the assumption that the returns received during a specific time period will continue throughout the year. Yield is often used to measure bond or debt performance, but it can also be used to record anticipated returns on real estate investments.
While yield measures your investment return, it’s not the same as the total return on your investment, which expresses what an investor actually earned on an investment during a certain period of time. Total return will include all income forms, including dividends, interest and capital gains but it is a retrospective or historical look at what an investor earned.
Examples of term
A real estate investor’s yield on an investment property may be 5%, based upon rental income but excluding any capital gains that accrued because of property value appreciation.