Yield Vs. Return (Definitions, Differences, and Examples)
By Indeed Editorial Team
Published June 1, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Yield and return are terms that people often use interchangeably, but they have different meanings. A yield represents the expected earnings on an investment, while a return shows the dollar performance during a particular period. If you work in a financial advisory role, understanding the difference between yield vs. return can help you advise clients to make the most profitable investment decisions. In this article, we define yield and return, list the differences between the two, and provide examples of how to calculate both.
What is yield vs. return?
To understand the differences between yield vs. return, it's important to review the definition of each term:
Definition of yield
A yield is the anticipated income on an investment generated over a period of time. It's typically shown as a percentage of the investment's face value, which is its original cost. Yield is generally a projection of the expected earnings on an investment, assuming all other conditions remain unchanged. It also considers an investment's liquidity, which is how easy it is to trade it for cash. While face value represents the original cost of the investment, market value shows its worth according to other investors in the marketplace.
A yield also includes the dividends that a security produces for its holder during a certain period. Yields can differ based on their valuation. There are generally two types of yields, known yields and anticipated yields. Known yields have a fixed valuation, while anticipated yields have a fluctuating valuation.
Definition of return
A return, financial return, or total return measures an investment's overall performance during a specific period. It shows the actual dollar amount that the investment gains or loses over time. Return calculations also account for any earned interest, dividends, or capital gains, such as an increase in the share price.
Rate of return
The rate of return (ROR) is similar to a return, as it measures the gain or loss of an investment over a certain period. One key difference is that, while a return shows the absolute dollar amount of the profit or loss, an ROR represents it as a percentage of the original investment cost. Yield also differs from ROR, although they are both percentages that describe the performance of an investment over a period of time, usually a year.
ROR shows the total gain on any investment, including its capital gains, while yield doesn't consider capital gains in its calculation. Additionally, ROR applies to many types of investment, such as assets, stocks, and art, while yield has a limited application because not all investments produce dividends or interest. Examples of investments that don't produce dividends are stocks, bonds, and mutual funds.
What are the key differences between a yield and a return?
The main ways that a yield differs from a return are:
Forward-looking vs. backward-looking
Yield measures the expected annual income relative to an investment's market value or initial cost. This makes it a forward-looking assessment as it shows what the investor might gain or lose on their investment. Yield also considers interest rates during its assumptions. Return is a more backward-looking or retrospective assessment. It measures the amount of profit or loss on the investment.
Measure of income vs. change in value
Yield only depicts the income and earnings from an investment. It's not a measure of capital gains and doesn't consider the dividends on the investment. Investors that focus on yield generally only want income with little interest in growth. Return represents the overall change in value, assuming the fund's owner reinvests the dividends and capital gains.
Percentage increase vs. actual dollar amount
Both terms have different expressions when calculating. Return appears as an absolute dollar amount, referring to the specific earnings over a past period of an investment, excluding the rate of return. Yield doesn't show the actual dollar amount of the gain on the investment as it's a percentage projection calculated on an annual basis.
Future risk vs. no risk
Risk is a primary component of yield as it's a future projection that helps guide investment decisions. The higher the risk, the higher the associated yield potential. Return represents no risk, as it's merely a metric that measures past performance.
Return types and calculations
Here's a list of different types of returns:
Return on equity
Return on equity (ROE) measures the profitability of a business by dividing the company's annual return or net income by the value of its total shareholder equity. Expressed as a percentage, ROE measures the earned profit for every dollar of shareholder equity. The formula for ROE is:
ROE = (annual net income / shareholders' equity) × 100
Example: A consumer goods corporation reported a net income of $500,000 at the end of last year. The average equity capital during that period was $5,000,000. The business can make the following calculations to determine its return on equity:
ROE = (500,000 / 5,000,000) × 100
ROE = 0.1 × 100
ROE = 10%
The business's return on equity is 10%.
Return on assets
Return on assets (ROA) is a metric that businesses use to measure their profitability in relation to their total assets. It specifically describes the efficiency of a company's management in generating profits from their economic resources. The higher the return, the higher the productivity and efficiency of the management in using their economic resources and vice versa. The formula for ROA is:
ROA = (net income / assets) × 100
Example: A clothing retailer made $100,000 in net income last year. Their total assets during that period amounted to $300,000. The company can make the following calculation to determine its return on assets:
ROA = (100,000 / 300,000) × 100
ROA = 0.3 × 100
ROA = 30%
The clothing retailer's return on assets is 30%.
Return on investment
Return on investment (ROI) enables businesses to evaluate their net profit against the cost of an investment or the relative productivity of different investments. It's the return for every dollar invested. To calculate ROI, divide the return by the initial cost of the investment, then multiply the result by 100 to determine the percentage. The formula for ROI is:
ROI = [(gain from investment - cost of investment) / (cost of investment)] × 100
Example: Imagine you invested $100 into each a manufacturing company and a construction company and wanted to determine which was more profitable. After a year, the cash flows for both investments were $500 and $400, respectively. You can determine the more profitable investment by making the following calculations:
ROI of manufacturing company = (500 – 100) / (100) × 100
ROI = 4 × 100
ROI = 400%
ROI of construction company = (400 – 100) / (100) × 100
ROI = 3 × 100
ROI = 300%
The manufacturing company was more profitable than the construction company due to a higher return on investment.
Yield examples and calculations
Here's a list of common types of yield:
Interest yield is the yield received from investments, usually bonds. This interest is often in the form of coupon payments, which can be annual or semi-annual. Calculating interest yield requires dividing the earned yearly interest by the face value of the bond, then multiplying the resulting value by 100 to express it as a percentage. You can evaluate interest yield using this formula:
Interest yield = (annual interest / bond's face value) × 100
Example: An employee of a consulting firm recently received a promotion at work and decided to invest their salary increase. They selected a bond with a face value of $1,000 that matures after one year and pays a 5% annual interest rate. After five years, they accrue $50. The calculations below show how to evaluate the interest yield on the bond:
Interest yield = (50 / 1000) × 100
Interest yield = 0.05 × 100
Interest yield = 5%
The interest yield on the investment is 5%.
A dividend yield typically relates to stocks and measures the income that stockholders receive in the form of dividends. Dividend frequency can vary and may be monthly, quarterly, semi-annually, or annually. Calculating dividend yield involves dividing the annual dividends per share by the current share price, then multiplying the resulting value by 100 to get its percentage value. The formula for calculating dividend yield is:
Dividend yield = (annual dividend per share / current share price) × 100
Example: Suppose a manufacturing company's stock is trading at $40 and pays annual dividends of $2 per share to its shareholders. You can calculate the company's dividend yield by following these steps:
Dividend yield = (2 / 40) × 100
Dividend yield = 0.05 × 100
Dividend yield = 5%
The dividend yield that each shareholder receives is 5%.
Explore more articles
- TCP vs. UDP: Understanding the Differences and Features
- Understanding Project vs. Program (Explanation and Examples)
- Design Jam: How to Run a Successful Meeting (With Tips)
- 9 Sustainable Initiatives to Implement in the Workplace
- Data Mart vs. Data Warehouse (With Benefits and Tips)
- What Are Email Management Tools? (With Benefits and Tips)
- What Is Lean Management? (Principles, Tools, and Advantages)
- How to Write a Compelling Product Description That Sells
- MD vs. PhD Degrees: Key Differences and Career Tips
- A Step-by-Step Guide on How to Create Print Area in Excel
- What Is a Customer Base? (With Steps to Grow Yours)
- How to Post on IGTV and When to Use It (With Tips)