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. Can I use the current yield to compare a bond to an equity investment?

    Learn about the different types of yield measurements for stocks and bonds, and find out how to make careful comparisons ... Read Answer >>
  4. What is the difference between the yield of stock and the yield of a bond?

    Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond ... Read Answer >>
  5. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
  6. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
Related Articles
  1. Investing Basics

    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 Basics

    Calculating Capital Gains Yield

    Capital gains yield refers to a security’s appreciation or depreciation during the time it’s held.
  4. Fundamental Analysis

    Yield Investing: Dividend, Earnings And FCF

    There are numerous ways to value investments, and many investors prefer a specific valuation method. Yield investing is one way to value a stock by comparing the current price to various factors. ...
  5. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  6. Active Trading

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
  7. Bonds & Fixed Income

    4 Types Of Money Market Yields

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

    How to Get More Yield From Your Investments

    Yield seeking investors can boost the amount of income their investments generate through tweaking their portfolio of stocks and bonds.
  9. Investing Basics

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
  10. Bonds & Fixed Income

    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 ...
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. Return

    The gain or loss of a security in a particular period. The return ...
  4. Yield On Cost - YOC

    The annual dividend rate of a security divided by the average ...
  5. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  6. Indicated Yield

    The dividend yield that a share of stock would return based on ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center