What is Portfolio Yield?
Portfolio yield is something that every income investor should be concerned about because it’s the primary driver of income and cash flow. The yield of any investment is income expressed as the interest or dividend income earned on the portfolio over a specific period of time, usually a 12-month period or longer. Yield is expressed as a percentage of the total asset value, or sometimes cost and represents the amount of income the asset creates. However, portfolio yield does not take capital gains or losses into account, only interest or dividend income. The yield on the portfolio depends on several different factors including the types of securities included, the impact of economic and political events on the securities, the asset allocation within the portfolio, and so on. The goal of any income investors is to maximize the yield of their portfolio so they maximize their cash flow and income on their path to financial freedom.
While maximizing portfolio yield is a great strategy to produce predictable passive income, chasing yield above all else is extremely dangerous especially for dividend paying stocks. The biggest risk to chasing yield for dividend paying stocks is the company paying those big dividends, and thereby generating a high yield, wont be able to maintain that level of payouts over time. When evaluating any dividend stock or subsequently any attractive yield – you will want to also inspect the payout ratio of the company. The payout ratio is the percentage of earnings a company pays out as dividends and a high payout ratio (anything over 60) could indicate an unsustainable dividend which would lead to a dividend cut and the yield to potentially evaporate. The payout ratio is one of my five component for dividend stock screening and a critical component to evaluate when choosing an investment.
Types of Yield:
- Dividend Yield – annual dividends per share divided by price per share.
- Cost Yield – annual dividends per share divided by the price per share you paid.
- Coupon – the yield that is locked in at the time the bond is bought.
- Current Yield – the interest rate (yield) as a percentage of the current price of the bond.
- Yield to Maturity – estimated total repayment you will receive if the bond is held to maturity.
- Dividend Yield – same as an individual stock, but it encompasses all the dividends and income generated from all companies within the fund. Make sure you are looking at a net income measure which subtracts the expense ratio of the fund, so you are looking at the cut you get to keep and the true income generated.
- SEC Yield – the yield reported by the companies within the fund as is required by the Securities and Exchange Commission (SEC).
- Rental Yield – the net of your annual rental income minus any expenses like mortgage, property management fees and repairs.
How to Calculate Portfolio Yield:
To calculate portfolio yield, you first need to calculate the yield on each asset. If your portfolio is only comprised of stocks, then you would need to calculate the yield on each stock. If other asset types such as bonds are included, the yield takes the return on those assets into consideration as well. In this example, we will assume the portfolio is comprised of stocks only. To calculate the yield on each stock, the following steps should be taken:
- Ascertain the current price of each stock within the portfolio and multiply it by the number of shares owned to obtain the total value of each stock. For eg. XYZ stock price is $20 per share and you own 100 shares, so the total value of XYZ stock is $20 x 100 = $2000. Do this for each stock.
- Ascertain the dividend per share of each stock and multiply it by the number of shares to obtain the annual dividend income on each stock. If no dividends are paid on that stock, assign a value of zero. Eg. XYZ dividend per share is $5 per share so for 100 shares the total return would be $5 x 100 = $500.
- Add up the portfolio value of all stocks to arrive at total portfolio value. Eg XYZ portfolio value = $2000, ABC portfolio value = $1500, QRS portfolio value = $750 etc so total portfolio value = $2000 + $1500 + $750 = $4,250.
- Add up the annual dividend income of all stocks to get total portfolio dividend income. Then subtract any relevant fees or charges. Eg XYZ dividend income = $500, ABC div. income = $250, QRS dividend income = $80, so total portfolio dividend income = $500 + $250 + $100 = $850. If charges = $5, net = $845
- Divide total portfolio dividend income by total portfolio value and multiply the result by 100 to arrive at portfolio yield. For our eg. Portfolio yield = (845/4250) x 100 = 19.88%.
For ETFs and mutual funds, portfolio yield is calculated in a similar manner. The annual dividend paid on the fund is divided by the current value of the fund or ETF, and the result is multiplied by 100 to get portfolio yield.
Portfolio yield ultimately depends on the composition of the portfolio and how each asset has performed during the period. Usually, the riskier the assets involved, the greater the potential portfolio yield. However, since dividends are not a guarantee and are not always paid for every stock, the portfolio yield may not be as high as desired. Asset selection is therefore important when seeking maximum yield on a portfolio. Make sure you track your portfolio yield to truly understand how hard your portfolio is working for you and the income its providing you year on year.