Running Yield represents the annual income generated by an investment as a percentage of its current market value. It provides investors with a means to evaluate the income-generating potential of their investments relative to their current worth.
Historical Context
Running Yield has been a critical concept in the finance world since the early days of investment analysis. Historically, it was crucial for investors in bonds and income-focused portfolios to understand their returns relative to the market value of their holdings.
Types/Categories
Fixed Income Investments
- Bonds: The running yield for bonds is calculated by taking the annual coupon payments and dividing them by the current market price of the bond.
- Preferred Shares: These stocks typically pay fixed dividends, and their running yield can be similarly calculated.
Equities
- Dividend Stocks: The running yield for dividend-paying stocks is the annual dividends divided by the stock’s current market price.
Key Events
While specific events aren’t typically tied to running yield, shifts in market interest rates, economic conditions, and changes in company dividends can significantly affect running yield values.
Detailed Explanation
The formula for calculating Running Yield is:
Example
If an investment portfolio generates £800 annually and is currently valued at £8,000, the Running Yield is:
Importance
Understanding running yield is essential for investors for several reasons:
- Income Evaluation: Helps in assessing the income-generating potential of an investment relative to its market value.
- Comparison Tool: Aids in comparing the income potential of different investments or portfolios.
- Investment Decision: Influences decisions on buying, holding, or selling investments.
Applicability
In Investment Portfolios
Running Yield is used to evaluate and compare the income yields of various assets within a portfolio, aiding in strategic asset allocation.
Retirement Planning
Investors can use running yield to gauge the income their portfolios will generate, aiding in planning for retirement income.
Considerations
While running yield is a useful measure, it’s important to consider:
- Market Fluctuations: Changes in market value can significantly affect running yield.
- Income Stability: Ensuring that the income used in calculations is reliable and sustainable.
Related Terms
Yield to Maturity (YTM)
The total return anticipated on a bond if it is held until it matures, considering both the annual income and any capital gains or losses.
Dividend Yield
A financial ratio that indicates how much a company pays out in dividends each year relative to its stock price.
Coupon Rate
The annual coupon payment paid by bond issuers relative to the bond’s face or par value.
Comparisons
| Term | Running Yield | Yield to Maturity (YTM) |
|---|---|---|
| Definition | Annual income as a % of current market value | Total return anticipated on a bond if held to maturity |
| Application | Current income evaluation | Long-term bond investment evaluation |
| Variability | Affected by market price changes | Considers future income and capital changes |
Interesting Facts
- Global Use: Running yield is a concept used internationally and is especially prevalent in bond markets.
Inspirational Stories
Successful Retirement Planning
An investor strategically using running yield to select high-yield dividend stocks could achieve a comfortable retirement through carefully planned, steady income streams.
Famous Quotes
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Proverbs and Clichés
- “A penny saved is a penny earned.”
- “Don’t put all your eggs in one basket.”
Expressions
- “Living off the interest”
- “Income investor”
Jargon and Slang
- Yield Chasers: Investors who seek high-yield investments.
- Coupon Clipping: Refers to investors collecting bond interest payments.
FAQs
What is a good running yield?
How often should running yield be calculated?
References
- Investopedia - Running Yield
- Morningstar - Understanding Yields
- Fabozzi, F. J. (2007). Bond Markets, Analysis and Strategies. Pearson.
Summary
Running Yield is a crucial metric for assessing the income-generating ability of investments relative to their current market value. It aids investors in making informed decisions, comparing investment options, and planning for income needs. Understanding its calculation and implications can significantly enhance investment strategies and outcomes.
