Yield is a recurring concept that you’ll encounter if you are working as or aspiring to become a financial advisor in Canada. It is one of the most vital numbers you can use to help your clients understand how their investments are working for them.
In this article, Wealth Professional Canada will explore everything that you need to know about yield. We’ll show you how to calculate it, why it matters, and how to use it to build better investment strategies for your clients.
Yield is the income an investment produces over a set period, usually a year, expressed as a percentage of the investment’s value. It does not include any profit from the investment’s price going up, which is called a capital gain. Instead, yield focuses only on the income your clients receive, such as:
For example, if an investor owns a stock that pays dividends, the yield is the amount of dividend income they receive compared to the stock’s current price. If another owns a bond, the yield is the interest income compared to the bond’s price. For rental properties, yield is the net rental income compared to the property’s value.
Watch this video to learn more about yield in investing:
Yields are especially vital when evaluating fixed-income instruments, since these investments provide regular interest payments that make up the bulk of their returns.
Yield is different from return. Return looks at everything that your clients have earned from an investment, including both income and any increase in the investment’s price.
On the other hand, yield only looks at the income part and is considered a forward-looking measure. This means it helps your clients see what they might earn in the future, not just what they earned in the past.
Total return includes both the income from yield and any increase in the investment’s price. In other words, yield is just one part of the total return on an investment. For example, if a stock pays a three percent dividend and its price goes up by five percent, the total return is eight percent.
As a financial advisor, you need to help your clients understand that a balanced asset mix needs both yield and growth. Focusing only on yield can lead to missed opportunities for capital gains, while focusing only on growth can mean missing out on steady income.
Most trading platforms show yield information for stocks, exchange-traded funds (ETFs), and bonds. Still, knowing how to calculate yield can help you explain investment income to your clients and better compare options.
Here’s how to calculate percent yield for the most common investments (plus sample scenarios!):
The dividend yield tells you the percentage of a stock or ETF’s price that your clients receive as dividend income each year. Here’s the formula for getting the dividend yield:
Sample scenario:
Suppose that Client A is considering buying shares in a certain company that trades at $50 per share. The company pays a quarterly dividend of $0.60 per share or $2.40 per share annually.
This means for every $100 invested, Client A can expect a dividend yield of 4.8 percent each year, not counting any changes in the stock price.
The current yield measures the annual interest income from a bond as a percentage of its current market price. Here’s the formula for getting the current yield:
Sample scenario:
Let’s say that Client B has purchased a Canadian government bond with a face value of $1,000 and a coupon rate of three percent. This pays $30 in interest each year. The bond is currently trading at $980.
Using the formula, you’ll get a current yield of 3.06 percent. This means that Client B earns approximately $3 in interest for every $100 invested at the current market price.
The rental yield shows the percentage of a property’s value that your clients earn as net rental income each year. Here’s the formula for getting the rental yield:
Sample scenario:
Client C owns a townhouse in Toronto valued at $800,000. The property brings in $3,000 per month in rent, or $36,000 per year. He pays $12,000 in annual expenses such as property tax, insurance, and maintenance.
To get the net annual rental income, deduct the annual expenses from the rental income. Then, using the formula to calculate the rental yield, you’ll get three percent. With this, Client C will earn $3,000 in net rental income each year for every $100,000 of the property value.
Yields are neither good nor bad on their own. They are simply a measure of how much income an investment produces. What matters is how the yield fits with your clients’ goals and risk tolerance.
A higher yield means more income, but it can also mean more risk. For example, a stock with a very high dividend yield might be in trouble. That skyrocketing yield could be a sign that the company’s stock price has dropped. On the other hand, a lower yield might mean the investment is safer or that it is expected to grow more in value.
You must be able to look beyond the yield number and consider the overall health and stability of your clients’ investments. It is critical to understand why a yield is high or low and whether it is likely to stay that way.
High yields can be risky. Sometimes, a very high yield is a warning sign that something is wrong with the investment. For example, if a company’s stock price drops sharply, the dividend yield can look very high. However, the company might not be able to keep paying that dividend.
Some companies pay high dividends by borrowing money or selling more stock. This isn’t sustainable in the long run. During the financial crisis of 2008, some companies had yields of 10 percent or more. Still, many of them cut their dividends or went out of business.
With this, you must always investigate why a yield is high before recommending it to your clients. It is better to choose investments with stable, reliable yields than to chase after the highest numbers.
Learn more when you watch this clip:
Wealth professionals face difficulties not just when discussing yields, but also in many other areas of their work. Here are five top challenges that financial advisors might encounter with their clients.
Yield can help financial advisors build portfolios that match their clients’ income needs. For instance, if your clients need regular income to cover living expenses, you should recommend investments with reliable yields. This can be dividend-paying stocks or rental properties. Bonds can also be a good option.
It is also critical to consider the impact of inflation. If the yield on an investment is less than the rate of inflation, your clients’ purchasing power will go down over time. This is called the real yield. For example, if an investment yields four percent but inflation is three percent, the real yield is only one percent.
Financial advisors must always look at both the yield and the real yield to make sure their clients’ investments are keeping up with the cost of living.
A yield trap is when an investment looks attractive because of a high yield, but the yield is not sustainable. This can happen if a company is struggling or if the market price has dropped for a reason.
To avoid yield traps, you need to:
Yield shows the income your clients can expect from their investments and helps you compare different opportunities. When you learn more about yield, you can build strategies that provide steady income and long-term growth for your clients.
Remember to always look at both yield and total return. Make sure to consider inflation, since rising prices can reduce the real value of your clients’ investment income. Be careful with investments that offer unusually high yields and always check if those yields are sustainable.
Keep scrolling down to see the latest news about yields in investment!
Investors pivot to direct deals and global diversification, fuelling momentum in offices and alternatives
Wall Street has grown uneasy about stretched valuations and the vast sums being spent on AI infrastructure
Thursday's data release was delayed by the government shutdown but is expected to inform rate trajectory bets
Pier 4's integrated approach to upgrading mid-sized buildings shows how disciplined execution can outperform market momentum
But investors are warned to expect further losses as correction could deepen to 20%
Bonds were the main beneficiaries as investors continued to seek havens
Advisor explains how bucketing allocations into yield, market, and defense has freed his asset allocation approach and eased client communication
Treasuries strengthened across the curve, while the dollar edged higher
Wells Fargo Securities, Fidelity Investments among those expressing concerns
Central bank cuts rate but warns policy support may be near its limit amid ongoing economic uncertainty
