Markets

Yield explainer: The importance of income

Years of low interest rates have helped to stabilise the global economy following the financial crisis in 2008, but one of the effects has been to drive down the yields available in asset classes such as bonds and equities, leaving investors scrambling for income. 

24/06/2015

Investment Communications Team

Investment Communications Team

What is yield?

Yield is the income return on an investment. In its simplest form, if you pay money into a bank account the bank pays you interest on the cash.

How is yield calculated?

Yield is most often expressed in percentage terms based on the investment's cost, its current market value or its face value, which makes it easier to compare the attractiveness of assets.

For example, if you buy a share worth £10 and it pays a dividend of £1 then the yield is 10%.

What is the difference between yield and return?

Yield is usually paid in the form of interest or a dividend on a quarterly, half-yearly or annual basis and ignores the capital value of an investment.

Returns take into account the capital value of an asset as well as the dividend and interest payments.

Why has income become so important?

Interest rates in most developed countries are now at or near historic lows. That means interest earned on money paid into banks and cash ISAs or invested in money markets is negligible.

Traditional sources of supposedly "safe" income, such as US, UK and German bonds, have now become prohibitively expensive to buy, while higher-yielding bonds are often deemed too risky for a conservative investor. The result has left investors hunting for good affordable yield.

Where can investors find yield?


Source: Thomson Reuters Datastream as at 10/06/2015


Source: Thomson Reuters Datastream as at 10/06/2015

Why is equity income such an important source of yield?

Equity yield can be variable whereas bond yield is fixed. In an inflationary environment, the real value of your dividend payment from your bonds will diminish over time, whereas companies have the ability to increase dividend payments.

Over long periods of time the biggest part of total returns comes from yield, when dividends are reinvested.



Why can’t I just buy the asset with the highest yield?

Investors should treat high-yielding assets cautiously. Higher yield often means more risk.

The second part in this series will explore where yield opportunities lie within European and UK equity markets.

Investors should research their investment thoroughly and consult their financial adviser.

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.