One of my goals for 2017 is to improve the diversity of posting formats on my blog. It’s not exactly ground-breaking stuff, but I’ve decided one of the new formats is going to be a Q&A – based off questions I’m asked in everyday life. If you’ve got a question you’d like to know the answer to, you can write to me at any time on this page.
The following is a question I was asked a few months ago which I thought might be useful for a wider audience.
Henry
On your blog, you regularly talk about ‘yield’, but I’m not sure what you mean. Like you, I want to pursue passive income opportunities, but I don’t really understand why it’s so important to investors like you.
You’re probably reading this and shaking your head at how I could be asking such an obvious question, but truthfully, I’ve just never thought about it much before. So could you tell me; What is yield? How can I go about pursuing yield? And finally, how much yield should I be seeking?
First off, let me say that no question is a stupid question if you don’t know the answer. We only learn because someone is willing to explain new ideas and teach us, so thanks for asking the qeustion \”What is yield?\”
I remember the first time I ever started looking at investment opportunities; it was just after my 16th birthday, and I was trying to figure out what to do with my birthday money. It wasn’t a huge sum, less than £1000 if I remember correctly, but at the time it seemed like a fortune. I started looking at all the options available to me.
After thinking about it, I decided that I essentially had two options. Firstly, I could spend the money on something I wanted – video games, or clothes, or a holiday with my friends. Alternatively, I could save it for the future. Thanks to the internet, I was quickly able to research several options, but how to prioritise them. The answer? Yield.
Yield is the return provided by a sum of capital, usually expressed as a percentage. It can be fixed (guaranteed in advance), or anticipated (dependent upon a set of conditions yet to occur). If I invest £100 in a business and get £5 back twelve months later, the yield of that investment would be 5%.
Essentially, the higher the yield, the more your money is ‘working’ for you. As an income-seeking investor, I usually pursue the highest yield I can find, but it’s important to remember that high yields can be an indication of hidden risks.
You’ve also asked what a ‘good’ yield is. It’s a little difficult to answer that, as it’s dependent upon what you’re using the money for. If you know you need £20,000 a year and have £500,000 to invest, a yield of 4% would be sufficient to generate the return you need. If you only had £250,000 to invest and required the same income, however, you’d need to achieve a yield of 8% to get the same sum every year!
You also must look at the entire market. For example, if your £500,000 house were rented for £10,000 a year, you would be achieving a yield of 2% – if there are bonds in the market paying more than that, you might consider selling the house and putting the money in the bonds (unless you were expecting significant capital gains on the house, in which case it might make more sense to hold onto it).
Yield can be found in lots of opportunities, from basic bonds and savings accounts to stocks and shares, mutual funds, property and private investments. It can be easy to get overwhelmed with options, so as a final thought, consider keeping a portion of your capital in cash to pursue new opportunities as they arise. Hopefully, my answer to your questions \”What is yield\” and \”How much yield should I be seeking\” has helped to clarify your question, but if not, feel free to contact me and let me know!