Understanding Yield

I’m going to talk a bit about yield, a term used to define a form of income from an investment, and how it can change.

I’ll start with an example of the small unit I rent out in a local retirement village. I paid R525 000 for it in 2012. My rent in the first year was R2200 per month, making it R26 400 over a year. R26 400 as a percentage of R525 000 is 5.03% This was my initial yield: 5.03%. My rent is currently R3024 pm, or R36 288 for the current lease year, which is now a yield of 6.91% against the price I paid for this income (unit). My yield is now about 37% higher than when I began. If someone bought one of these same, small units for R650 000 today and got the same current rent of R3024pm, their starting off yield would be 5.58%. This is 23% lower than what I currently receive.

Likewise, in the dividend bearing unit trust fund I wrote about recently, the starting off yield at the moment is currently about 2.76%. That means for R100 000 invested, the income will be R2760 per annum to begin with. I looked at a client who has been in this same fund for a few years and his yield is now 3.05%, so he is getting a higher income than someone who enters the fund today. I measured how another client’s income in this fund has grown by 19% in just over 2½ years. All this has nothing to do with capital growth or loss. We’re not talking about how the capital values of these sources of income might or have changed, we’re talking income.

If you buy a share of Clicks on the stock market, the current yield is around 2%. For a share of Spar, it is just over 3% and for Vodafone, a UK based cell phone operator, their yield is now over 6%. So Clicks would give you an initial dividend income of around R2000 a year if you spent R100 000 on buying just their shares. But Vodafone three times that. Many offshore yields are at attractive prices at the moment, meaning you get a higher income for what you’re paying for that income. My explanation has some simplicities in it, but the principle of the lesson will be what’s important.