In the previous post, we discussed what income return is, how
to identify and differentiate it from other types of returns. In that post we covered the rationale behind making
investment for income and the need to generate replacement income, more so if you
are investing for retirement.
In general, a return is the money gained from your
investment. For instance, if you buy a stock at $1000 and after one year you
sell them at $1500, your return on investment is $500. You made a return on
your investment because you sold your stocks at a profit. In percentage, your
return is 50% ($500/1000).
A part from selling to realize profit, you may earn return if
your investment generates some income on a regular basis. For instance you buy
a residential house worth $100,000 and rent it out. The property then generates
$10,000 in rent per annum.
In this case, you still own your property but receive a
return of $10,000 annually. Therefore, your yearly return is 10 percent
($10,000/$100,000). It is this kind of return (income return) that is referred
to as yield. Yield is the answer to “what guaranteed gain (return) will I get
from my investment?”
Remember, when you are waiting to sell your property or
investment position, the return is not guaranteed until the sale date. However,
with regular steady income, you are sure of return. Therefore, yield (income return) has no relation
to the price of your property – whether it falls or goes up. It is all about
receiving the money.
Weighing your investment Options
Yield concept is used in various investment decisions
dealing with income driven investment options including bonds, rental property
and even company stocks (in terms of dividends).
“Dividend Yield”, is simply an expression of your cash
return (through dividends) if you were to buy the stock at that particular
price. The company issuing the share
will have to pay you that dividend irrespective of the prevailing share market
price. Therefore, if your investment objective is geared towards income, then
yield is a vital parameter to look at when making investment choices.
Going back to our rental house example, assuming now you get
an opportunity to buy another rental property for $500,000 and it will earn
rent of $36,000 per year. A good amount of money, isn’t it?
You may be lured into thinking that this is more money ($36,000
compared to $10,000). However, the yield in this case is 7 percent ($36,000/$500,000)
which is obviously lower than the 10% from the first property. Faced with these
two scenarios, the best option (if you can access the required fund) is to buy
5 of the first units and earn $50,000 a year.
As said before, capital gains have their place in
investment, but you will definitely require your investment to generate some
income. The yield may be far more important to you than capital gains since it
is this yield that will sustain you.
With all this in mind, it is therefore advisable to compare
the different investment options available in terms of yield. This because you will
get the most out of your investment through passive income as opposed to
growing the asset value.
No comments:
Post a Comment