Written byYield is the income an asset produces over a year, expressed as a percentage of what it cost or what it is worth today.
Also known as: rental yield, dividend yield, gross yield, net yield
Key points
- Yield is a return per dollar invested, which makes it easy to compare a rental property, a parcel of shares and a term deposit.
- Gross yield ignores costs; net yield subtracts them, so the two sit far apart once interest and outgoings are counted.
- For shares the equivalent is dividend yield: the annual dividend divided by the share price, so yield rises when the price falls.
- Yield is not the same as total return, because it leaves out capital growth or any fall in the asset's value.
How yield is calculated
The basic sum is annual income divided by value. For a rental property that is a year of rent divided by the price. For a share it is the yearly dividend divided by the share price. For a bond, the coupon divided by the bond's current market price is the current yield, though a bond's quoted yield is usually the yield to maturity, which also counts the gain or loss to redemption.
Gross yield uses income before costs. Net yield takes the running costs out first: council rates, insurance, repairs, management fees and vacancy on a property. Net yield is the more honest number and it is usually a good deal lower. Neither version subtracts loan repayments, which is why cashflow and yield answer different questions.
Why yield moves when the price moves
Yield is a ratio, so it changes when either half changes. If rent stays flat and the property's value rises, the yield falls. If a share price drops and the dividend holds, the yield rises. A high yield is not automatically good news: it can mean the market has marked the price down for a reason.
It also means yields quoted on different bases are not comparable. A yield calculated on the original purchase price flatters an asset bought years ago. A yield on today's value tells you what the money currently tied up in it is earning. Check which one you are being shown before you compare.
Yield and borrowing
When finance is involved, the comparison that matters is the yield on the asset against the cost of the money used to buy it. If a commercial property nets less than the loan costs, the shortfall comes out of your pocket or other income. Lenders look at the same relationship when they assess a deal, alongside the loan to value ratio.
The same logic applies to equipment. A machine that adds enough billable hours can carry its own repayments; one that sits idle cannot. Weighing the income a purchase will produce against its total cost of ownership is the whole exercise, and your accountant can help you model it.
Example
An investor pays $650,000 for a townhouse that rents for $600 a week. A year of rent is $31,200, and dividing that by the price gives the gross yield. Then the costs come off: council rates, strata levies, insurance, repairs and letting fees, plus a fortnight of vacancy between tenants. The net figure is meaningfully lower, and it still does not include the loan repayments. Two properties advertising the same gross yield can leave their owners in very different positions once those costs are counted.
Not to be confused with
- Interest
- interest is what a lender charges you, while yield is what an asset earns its owner
- Comparison rate
- a comparison rate measures the cost of borrowing, not the return on an investment
- Cap rate
- in its capitalisation rate sense, a cap rate is a property's net yield measured against its current value
Frequently asked questions
What does yield mean in simple terms?
It is what something pays you each year, measured against what it is worth. Put the annual income on top and the value underneath, and the result tells you how hard your money is working. It lets you line up very different investments on the same scale.
How do you calculate rental yield?
Take the annual rent and divide it by the property's purchase price or current value. That gives the gross yield. For the net yield, subtract the running costs first, including council rates, strata, insurance, repairs, management fees and an allowance for vacancy.
What is the difference between gross yield and net yield?
Gross yield uses income before any expenses. Net yield uses income after the costs of holding the asset. Gross is the number in advertisements because it looks better. Net is the number worth acting on, because it reflects what actually reaches you.
Is a higher yield always better?
Not necessarily. A yield rises when the price falls, so a high figure can be a warning that the market doubts the income will hold. High yield assets also often come with weaker capital growth. Look at the quality and durability of the income, not just the ratio.
What is the difference between yield and total return?
Yield counts only the income an asset throws off. Total return adds any change in the asset's value. An investment can have a modest yield and a strong total return if it grows in value, or a strong yield and a poor total return if the value slides.
Related terms
Interest
Interest is the price of using money: what a borrower pays on a loan, or a saver earns on a deposit, expressed as a percentage rate on the principal.
Read definitionCash flow
Cash flow is the movement of money into and out of a business over a period; unlike profit, it tracks actual receipts and payments, so it measures liquidity.
Read definitionAsset
An asset is anything a business or person owns or controls that is expected to produce future economic benefit, such as cash, equipment, vehicles, property or receivables.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionLoan-to-value ratio (LVR)
A loan-to-value ratio (LVR) is the amount you borrow as a percentage of the value of the security, usually property, and a key measure of lending risk.
Read definitionTotal cost of ownership (TCO)
Total cost of ownership (TCO) is the full cost of buying, financing, running and disposing of an asset over a set period, not just its purchase price.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.