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Lane, JD, CFP, MBA, CRPS
Category: Finance
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Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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hi....is yield the same as interest rate? i see in newspapers

hi....is yield the same as interest rate? i see in newspapers or magazines some mutual funds or stocks with a yield sometimes of say, 14.2% or say, 3.4%==does that mean the 14.2 percent is a better deal?...with interest, a cd paying 1% on \$10,000 would be \$100 a year...does that mean the 14.2% yield the same 10,000 would pay \$1,420 a year? .... if not, how is yield figured...i see it from 1% to over 15% and am not sure what it means....thank you.

Lane :

Hi,

Lane :

Your math is perfect ... but yield should really on be used to describe the INTEREST (for bonds or CD's) or dividend (for stocks) part of the return (not the growth of principal)

Lane :

Investopedia puts it this way: The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

Lane :

When we talk about a Stock that is selling at \$10 per share, but that at the end of a year is selling at \$12 per share that's not yield, that's 20% GROWTH of PRINCIPAL

Lane :

Now if that same stock pays a 3% dividend then it's TOTAL return has been 23% - 20% growth plus the dividend (yield) of 3%

Lane :

People DO use the word yield incorectly (from finance perspective) all the time ... the best way to think of yield is that it's INCOME , and even more ideally, it will be qualified in some way (interest yield, dividend yield)

Lane :

TO take tat idea a LITTLE further, SOME people will say that a stock has two yields (most academics in finance will say NO only dividend is yield, growht in stock price is appreciation or growth) ... but to carry the idea a little bit firther ... that yield means nothing without a modifier...

Lane :

Some will say there are two stock dividend yields. If you buy a stock for \$30 (cost basis) and its current price and annual dividend is \$33 and \$1, respectively, the "cost yield" will be 3.3% (\$1/\$30) and the "current yield" will be 3% (\$1/\$33).

Lane :

And on bonds there are really four types of yields (again, each needing to be qualified - have modifier)

Lane :

(1) coupon yield (the bond interest rate fixed at issuance),(2) current yield (the bond interest rate as a percentage of the current price of the bond), and (3) yield to maturity (an estimate of what an investor will receive if the bond is held to its maturity date). And finally, non-taxable municipal bonds will have a tax-equivalent (TE) yield determined by the investor's tax bracket.

Lane :

And just to be thorough, lets take mutual funds:

Lane :

Mutual fund yields are an annual percentage measure of income (dividends and interest) earned by the fund's portfolio, net of the fund's expenses. In addition, the "SEC yield" is an indicator of the percentage yield on a fund based on a 30-day period.

Lane :

Sorry for the data dump, but if you'll use this as a key, you cn always make those throwing the word around be specific enough for it to meant somethin .... The MOST important distinction? Yield means income.

Lane :

Hope this helps

Lane :

Lane

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane :

Let me know ...

Lane :

Lane

Hi,

... just checking back in, as I never saw you come into the chat.

One last thought ... In comparing BONDS? (always compare Yield to Maturity). That's the yield that takes both current price AND coupon (interest) into effect - and is the only real way to compare apples to apples.

Yield to maturity for bonds is like APR (Annual percentage rate) on a loan ... It, again, is the only way you can really compare loans across the board ... title pawn loans, for example, sometimes advertise 10%, but when expressed as an APR (like most mortgages) they can be as high as 100% APR (because of the daily compounding).

Let me know if you have further questions,

Lane
Customer: replied 3 years ago.

it is confusing....for mutual funds, you mentioned interest and dividends...does the interest mean the growth part and the dividend the yield part?....also, when a yield is given in a mutual fund, is higher better? what is the best way to judge a good mutual fund? thank you

Dividends for Mutual Funds are different that dividends for a stock.

Higher is ALWAYS better. But remember, you need that modifier to know what is MEANT by yield.

In the case of Mutual Funds, (a bucket of investments - a large Co mutual funds owns ;large company stocks, a bond fund owns bonds - a blended fund owns both) yield is used to describe TOTAL INCOME PART of the TOTAL return. Remember from above: Mutual fund yields are an annual percentage measure of INCOME (dividends and interest) earned by the fund's portfolio, net of the fund's expenses.

The other component of TOTAL RETURN on a MUTUAL FUND is the growth of the actual value (PRICE) of the stocks and/or bonds in the fund.

Only when you add yield and growth of Net Asset Value for a fund do you get TOTAL return.

So yes, higher is always better, but yield is not the total story.

Depending on how much risk/volatility you want in your investments, a growth mutual fund (a mutual fund that owns company stocks that are in the growth mode) may not have a high yield, but MAY have a HIGHER TOTAL RETURN than a more conservative stock mutual fund that owns blue chip sticks that always pay dividends.

Used correctly, Yield needs it's modifier, and always means income. (interest or dividends or both) ... in a CD where the principal DOESN'T grow the yield IS the TOTAL return.

Hope this helps

Lane