Yield (finance)

In finance, the yield on a security is the amount of cash (in percentage terms) that returns to the owners of the security, in the form of interest or dividends received from it. Normally, it does not include the price variations, distinguishing it from the total return. Yield applies to various stated rates of return on stocks (common and preferred, and convertible), fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products (e.g. annuities).The coupon rate (also nominal rate) is the yearly total of coupons (or interest) paid divided by the Principal (Face) Value of the bond.Like bonds, preferred shares compensate owners with scheduled payments which resemble interest. However, preferred 'interest' is actually in the form of a dividend. This is a significant accounting difference as preferred dividends, unlike debt interest, are charged after taxes and below net income, therefore reducing net income and ultimately earnings per share. Preferred shares may also contain conversion privileges which allow for their exchange into common stock.Like preferred shares but units in a trust. Trusts have certain tax advantages to standard corporations and are typically deemed to be 'flow-through' vehicles. Private mutual funds trusts are gaining in popularity in Canada following the changes to tax legislation which forced many publicly traded royalty trusts to convert back into corporations. Investors seeking the high yields typically associated with the energy royalty trusts are increasingly investing in private mutual energy fund trusts.Common shares will often pay out a portion of the earnings as dividends. The dividend yield is the total dollars (RMB, Yen, etc.) paid in a year divided by the spot price of the shares. Most web sites and reports are updated with the expected future year's payments, not the past year's.The life annuities purchased to fund retirement pay out a higher yield than can be obtained with other instruments, because part of the payment comes from a return of capital. $YearlyDistribution / $CostOfContract.Like annuities, distribution yields from REITs, Royalty trusts, and Income trusts often include cash that exceeds the income earned: that is return of capital. $YearlyDistribution / $SharePrice.Several different yields are used as measures of a real estate investment, including initial, equivalent and reversionary yields.All financial instruments compete with each other in the market place. Yield is one part of the total return of holding a security. A higher yield allows the owner to recoup his investment sooner, and so lessens risk. But on the other hand, a high yield may have resulted from a falling market value for the security as a result of higher risk.