What is 'Cash-On-Cash Yield'

Cash-on-cash yield is a basic calculation to estimate the return from an asset that generates income. Cash-on-cash yield also refers to the total amount of distributions paid annually by an income trust as a percentage of its current price. The cash-on-cash yield is a measurement technique that can be used to compare different unit trusts.

BREAKING DOWN 'Cash-On-Cash Yield'

The cash-on-cash yield is useful as an initial estimate of the return from an investment, but has a number of limitations. It may overstate yield if part of the distribution consists of a "return of capital," rather than a "return on capital," as is often the case with income trusts. Also, as a pre-tax measure of return, it does not take taxes into consideration. For example, if an apartment priced at $200,000 generates monthly rental income of $1,000, the cash-on-cash yield on an annualized basis would be 6%.

In the context of income trusts, assume a trust with a current market price of $20 pays out $2 in annual distributions, consisting of $1.50 in income and 50 cents in return of capital. The cash-on-cash yield in this case is 10%, but since part of the distribution consists of return of capital, the true yield is 7.5%. The cash-on-cash yield measure overstates the return in this case.

RELATED TERMS
  1. Cash-On-Cash Return

    A rate of return often used in real estate transactions. The ...
  2. Estimated Long-Term Return

    A unit investment trust's estimated return over the life of the ...
  3. Distribution Yield

    The amount of cash flow received or paid out by an annuity, REIT ...
  4. Running Yield

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

    The income return on an investment. This refers to the interest ...
  6. Estimated Current Return

    The estimated return for a unit investment trust over the short ...
Related Articles
  1. Investing

    What's a Cash-On-Cash Return?

    A cash-on-cash return reveals the cash return on a real estate investment.
  2. 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.
  3. Investing

    What You Need To Know About Bond ETF Yields

    When it comes to fixed income investing, yield is an important component of a bond investment’s total return to accurately assess if it's the right move.
  4. Investing

    Calculating Capital Gains Yield

    Capital gains yield refers to a security’s appreciation or depreciation during the time it’s held.
  5. Investing

    4 Types Of Money Market Yields

    We give you four equations to help figure out the yields on your investments.
  6. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  7. 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.
  8. Investing

    Unit Investment Trusts Market: 3 Trends in 2016

    Learn more about unit investment trusts (UITs), and discover some of the most common trends in the UIT market to date in the year 2016.
  9. Investing

    A Look Into Creating a Trust Fund With ETFs (VCIT, SDIV)

    Learn the basics of how a trust works and the two most common types. Discover how to use ETFs to fund a trust and the different strategies.
  10. 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 ...
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. 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 >>
  3. How are trust fund earnings taxed?

    Trust fund earnings that are distributed are paid by the beneficiary. The trust pays taxes on retained earnings and principal ... Read Answer >>
  4. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center