What Is Gross Yield?
The gross yield of an investment refers to its profit before taxes and expenses are deducted. Expressed as a percentage, it is calculated as the annual return on an investment (prior to taxes and expenses) divided by the current price of the investment.
Key Takeaways
- Gross yield represents the overall return on an investment without deducting taxes and expenses.
- It helps compare the relative returns of various investments, such as bonds, mutual funds, and rental properties.
- Net yield is the actual return realized by the investor after all deductions.
How Gross Yield Works
Gross yield is used for numerous investments including real estate, fixed-income securities, and mutual funds, though it is only one measure of return on investment. In scenarios like rental property investments, the difference between gross and net yields may be substantial because of operating expenses, such as maintenance costs, insurance, and property taxes.
Mutual fund investors should pay close attention to the discrepancy between gross and net yields, ensuring that fund management and brokerage fees do not greatly reduce their actual returns.
Various Types of Yields
Understanding the different types of yields can enrich your investment strategy. Here are some common types:
Nominal Yield
Nominal yield, also known as coupon rate, is the fixed interest rate that a bond issuer promises to pay to bondholders. It is derived by dividing the coupon rate by the bond’s par value and remains fixed for the bond’s entire life span.
Current Yield
The current yield of a bond equals its annual earnings or dividends divided by its current market price. This metric gives a snapshot of the return an investor would expect if the bond is purchased and held for a full year.
Yield-to-Maturity (YTM)
Yield-to-maturity (YTM) is more intricate and represents the total return anticipated on a bond if held until it matures. Expressed annually, it is similar to the internal rate of return (IRR) for a bond, assuming all payments are made as scheduled, making it also known as book yield or redemption yield.
Mutual Fund Yields
Mutual fund yields are reported using two primary methods: dividend yield and SEC yield.
Dividend Yield
Dividend yields are conveyed as an annual percentage of a mutual fund’s portfolio income, based on the net income received after accounting for the fund’s expenses.
SEC Yield
The SEC yield refers to yields reported by companies according to the Securities and Exchange Commission (SEC) regulations. This figure assumes that all securities in a fund’s portfolio are held until maturity.
Related Terms: net yield, annual return, fixed-income, internal rate of return (IRR), security yield.
References
- Investor.gov. “Mutual Fund Fees and Expenses”.
- U.S. Securities and Exchange Commission. “AMENDED AND RESTATED YIELD CALCULATION SERVICES AGREEMENT”.
