Searching for yield on your investments in a low interest environment is hard, but not impossible. Business Development Manager David Smith explains the challenges.
What is yield?
Yield is the income returned on an investment or security. Generally expressed as a percentage, yield measures the cash flow of an investment over the year ahead, and takes into account interest and dividends, but not capital growth. For example, if you invest $1000 into a stock with 4% yield per annum, your yield will be $40 every year. The total return an investment provides can be determined by calculating the yield of the investment plus capital growth.
Is yield important?
Yield is tied to your investment risk, and higher yields mean higher risk. If you’re investing for income, then yield is extremely important, as it provides greater certainty of return and a regular cash flow. For many Church organisations, the income they receive from their investments is what enables them to continue their mission. While there’s still a chance of a capital loss, the yield generated from the investments flows back to the organisation as income.
How do I invest for yield?
High yield investments have become popular since the Global Financial Crisis (GFC) ushered in a low growth environment. As economies around the world have low or no growth, and interest rates remain low, this puts pressure on investment returns. Pre-GFC, Term Deposits were high yielding investments (see graph 1.0) and investors could lock in term deposit rates as high as 6% pa, a higher return than bonds at the time. Term Deposit rates now sit between 2-3% pa, leaving little room for profit above inflation. This current low interest rate period will have long-term consequences. As interest rates remain low, the yield on higher risk investments (like stocks) is also low, meaning investors need to wait longer and take on higher risks to get higher yields.
Build an investment solution to suit you
Yields are all about product mix and time horizon. For more aggressive, higher yielding strategy, be prepared to pursue a longer term strategy and wait out any sudden changes in the market. Conversely, for more conservative strategies, a diverse product mix over a shorter time horizon will give you a lower yield.
In addition to yields, consider the strength and stability of the company you wish to invest in. For example, if there is a major scandal and their share price halves – not only is your yield affected, your initial investment is also at risk of being lost.
Searching for yield in a low interest environment is difficult but not impossible.