A:

Because investors are very concerned with how well their investments are performing or how they are expected to perform, knowing how to gauge such performance is essential. This makes understanding the difference between yield and return important.

While both terms are often used to describe the performance of an investment, yield and return are not one and the same thing. Knowing what each measure takes into account and recognizing that each considers different time periods is key.

Return, also referred to as "total return," expresses what an investor has actually earned on an investment during a certain time period in the past. It includes interest, dividends and capital gain (such as an increase in the share price). In other words, return is retrospective, or backward-looking. It describes what an investment has concretely earned.

Yield, on the other hand, is prospective, or forward-looking. Furthermore, it measures the income, such as interest and dividends, that an investment earns and ignores capital gains. This income is taken in the context of a certain time period and then annualized, with the assumption that the interest or dividends will continue to be received at the same rate. Yield is often used to measure bond or debt performance; in most cases, total return will not be the same as the quoted yield due to fluctuations in price.

(To learn more about yield, check out the Bond Basics Tutorial.)

RELATED FAQS
  1. What is the difference between yield and rate of return?

    Read about the differences between yield and rate of return. See why many novice investors often struggle more with the concept ... Read Answer >>
  2. Which is more important - dividend yield or total return?

    Learn to distinguish between those times when dividend yield or total return is a more useful performance metric for a company's ... Read Answer >>
  3. What is the difference between yields and interest rates?

    The main difference between yields and interest rates is that each term refers to different financial instruments. Yield ... Read Answer >>
  4. What size of annual dividend yield is typical of companies in the financial services ...

    Learn the importance of calculating the annual dividend yield and how income investors can use it to analyze companies in ... Read Answer >>
  5. How can I use the holding period return yield to determine whether or not I should ...

    Find out how to use the holding period return yield formula to determine whether it is a good time to sell your bond based ... Read Answer >>
  6. What is the difference between a company's annual return and its annualized return?

    Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >>
Related Articles
  1. Investing

    Yield vs. Total Return: How They Differ

    Understanding yield vs. total return is essential in constructing portfolios that meet income generating needs while providing growth for the future.
  2. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  3. Investing

    How Bond Yields Could Topple the Stock Market

    Bond yields have reached a crucial point since the election that could be bad news for the stock market.
  4. Managing Wealth

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  5. Managing Wealth

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
  6. Retirement

    Is It Safe to Shoot For Higher Yields When You're Retired?

    Find out how reaching for yield in retirement can create more risk than returns and the alternative for boosting retirement income.
  7. Investing

    4 Types Of Money Market Yields

    We give you four equations to help figure out the yields on your investments.
  8. Investing

    Are High-Yield Dividend Stocks Good for Income Investors?

    High-yield dividend stocks can be an enticing alternative for income, but it's important to research them carefully before investing.
  9. Investing

    Bond Yields: Current Yield And YTM

    A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ...
  10. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
RELATED TERMS
  1. Yield

    The income return on an investment. This refers to the interest ...
  2. Running Yield

    The annual income on an investment divided by its current market ...
  3. Earnings Yield

    The earnings per share for the most recent 12-month period divided ...
  4. Return

    The gain or loss of a security in a particular period. The return ...
  5. Average Annual Yield

    The average yield on an investment or a portfolio that results ...
  6. Yield Spread

    The difference between yields on differing debt instruments, ...
Hot Definitions
  1. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  2. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  3. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  4. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  5. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  6. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
Trading Center