Terms in investing continued, with the measuring terms of yield and return, discussed today.
If you earn cash from renting a property, then you receive a yield from that investment. Likewise if you receive cash in the form of interest received from your bank deposit, or cash in the form of dividends from owning shares, or cash payments received from your Marriott Investments, in all of these cases you are receiving a ‘yield’ from your investment. However, the correct description is to say that yield is a means to measure this income, expressed as a percentage. You arrive at the yield by dividing the amount of cash you receive per annum from your investment, by the price you paid for that investment. So if you receive R500 per month from a R100 000 bank deposit, this is R6000 per annum giving you a 6% yield. If you paid R800 000 for a property and you get R6000 per month rent from your tenant, then you are enjoying a yield of 9% on this investment. If you buy some shares on a stock market to the value of R100 000 and the declared dividend yield is 3%, then you will receive R3000 in the first year.
Return is also expressed as a percentage, measured over differing periods of time. It is used to state the overall change in value of your investment, whereas with yield we only measured the income received. So if your R100 000 share portfolio after a year is worth R114 000, then that is a return of 14% for the year. If you receive a firm offer of R900 000 a year later for the house that you paid R800 000 for – which you lived in, so there is no yield received – then that is a return of 12.5% for one year. But further down the road, another guy was offered R750 000 for his house that he also paid R800 000 for a year earlier. If he sells, his return is about -6.25%. If he doesn’t sell, it is only a loss ‘on paper’, for the time being.
My day at Coronation in Cape Town this past week was very good and worthwhile. The content I enjoy from this, which we cannot get from their normal road shows, are the talks about the rigorous due diligence requirements of the business, the processes of how a trade takes place, the checks and balances of the movement of money, the security requirements of the IT department, the scrutiny from foreign compliance people before being allowed to accept international business… all very interesting to hear. I hijacked my own consultant to take me through the floors and offices of the trading desks to see the people who watch 6 computer screens at once tracking global stock markets with constantly changing shares prices. Good to ‘kick the tyres’ of a company.