This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
While in the world of farming, increased yield is certainly a goal for maximizing profit, in the investing world, the concept of “yield” is not consistent.READ THE ARTICLE
This is because there are three main types of yield we’ve come to know, two of which can be very costly and unwanted. They include:
📌 Dividend yield: This relates to stocks you own, and the total is your dividend amount divided by stock price. While dividends are paid out of investments, they are not contractually obligated by companies. With being considered income, they are also taxable.
📌 Distribution yield: This relates to a fund, such as a mutual fund or ETF, and just like a dividend yield, its total is calculated by taking the distribution divided by the share price of the fund. Distribution yields are the result of funds that have received income (which is taxed and passed onto you), or can come from the sale of underlying assets and locked-in gains (capital gains, also taxed).
Why are these yields different? Dividend and distribution yields “are not additional return for you… They are a partial return of your investment to you.” Not only are you unable to choose the timing of these events, but they are also taxable, and have little impact on your overall return.
Bond yield: Here is where you will find your most meaningful yield as an investor. Because of their contractual agreements to pay income, bond yields help you recoup part of your investment immediately. This is income in addition to your investment, versus being deducted from your investment. Much like for a farmer, “bond yield reflects more return.”
Big picture wealth: Your financial success isn’t about dividend yield or passive income generation. In reality, much of this is not as great as you might think it is. At the end of the day, it’s about TOTAL return.