Since you calculate yield by dividing the
amount you receive annually in interest or dividends by the amount
you put into the investment, you can compare the rate at which
different investments are contributing to the value of your portfolio.
For example, if you’re earning $500
a year on a money market mutual fund in which you’ve invested
$10,000, and you earn another $500 on a savings account in which
you deposited $20,000, your income is the same, but your yield
is different. The mutual fund yield is 5% ($500 / $10,000 = 0.05,
or 5%), but the savings account yield is just 2.5% ($500 / $20,000
= 0.025, or 2.5%).
On the other hand, it can be difficult to
use yield to compare different types of investments. For example,
you don’t want to compare a 2% stock yield to a 6% bond yield
and conclude the stock is underperforming. That’s because
there may be a stronger potential for the stock price to increase,
providing a larger total return.
