My F&M

Yield versus Total Return

Share This Article

Have you ever opened your Schwab brokerage statement or Foster & Motley appraisal and thought to yourself…this is like reading Greek?  You are not alone. The financial services industry, like a lot of industries, has its own set of terminology.  While our intent is to provide a thorough report of your portfolio’s activity and performance, we realize that sometimes industry terms can be bewildering. 

Two terms that often lead to misunderstanding are yield and total return.  Yield (sometimes called “current yield”) measures the income that an investment generates or earns.  Income generated from bonds is called interest, and income generated from stocks and mutual funds is called dividends.  Yields are often expressed as a percentage of an investment’s current value.  For example, the current yield of XYZ stock trading at $33.50 per share and paying an annual dividend of $1.00, is 3% ($1.00 divided by $33.50).  Yields are also generally expressed on an annualized or forward-looking basis, meaning that income received over some length of time is converted to a rate that is expected to be received yearly.  An annualized rate is just an estimate and not a guarantee. For example, on January 31, 2014 XYZ company paid a quarterly dividend of $0.20 per share.  If the company pays that same amount for the next four quarters the total amount of the annual dividends per share would be $0.80 or an annualized yield of 2.4% (assuming the same stock price of $33.50).  However, let’s say that the company raises its quarterly dividend to $0.25 per share in April; the annualized yield would increase to 3.0% based on the new annual dividend of $1.00 ($0.25 x 4).   

Why is yield important?  First, a company’s ability to pay its investors a steady stream of cash over time is a good indicator of that company’s financial strength and long-term viability.  Second, a steady stream of cash flow provides a stable contribution to a portfolio’s total return, which is especially important during downturns in the market.   

Total return, on the other hand, not only includes the income of an investment but also its appreciation (capital gain) or depreciation (capital loss) in value.  A capital gain or loss occurs when a security’s price increases or decreases in value.  Unlike the yield of a portfolio, total return is backward looking, meaning that it measures the performance of an investment over some previous time period.  There are various methods of calculating performance, but we use  time-weighted rate of return.  The total account performance presented in client appraisals is calculated net of all commissions and trading costs.  We also present performance gross and net of our fees on the Account Summary report page and gross of fees on the Portfolio and Asset Class Performance History report as recommended by the CFA Institute.

Yield and total return are just two of the measures to examine when assessing whether a portfolio is achieving your financial goals. Please feel free to ask us about these terms at your next meeting.