Yield vs. Return: what’s the difference?

by | Corporate Finance | 0 comments

Many times we use the terms return and yield interchangeably, and that may be because both concepts describe investment performance. But they are not the same.

The difference is this simple: return is backward-looking, yield is forward-looking.

Return

Return is a measure of earnings and gains/losses achieved on an investment over a time period in the past.
It includes:

  1. Capital gain or loss (e.g., changes in the price of a stock)
  2. Dividends received
  3. Other cash flows, for example additions or withdrawals

Yield

Yield can be thought of as the expected (i.e., future) return of holding an investment over a certain period of time, assuming dividends and cash flows received are reinvested at the same rate.

Unlike the return concept, yield does not include capital gain or loss. Yield is typically used when talking about bonds or other fixed-income instruments, and less often used with dividend paying stocks.

One more thing…

Yield is typically quoted on an annual basis. Return is annualized when the measurement period is longer than a year; however, when the period is less than one year, return is shown as is.

In general, actual returns differs from the yield quoted at the beginning of the investment period due to fluctuations in stock or bond price (capital gains or losses).

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