### Investment Compounding Calculator

## How to work out your yield on any investment

When investing/holding assets, there are two different types of returns, capital gains and income. While many people focus on capital gains, it is essential to know the yield of any investment and how you can calculate this.

In layman’s terms, you calculate the yield on any investment using the income received as a percentage of the overall value. However, you might need to make adjustments to calculate a more appropriate yield in certain situations.

## Stock market investment

Many companies on the stock market pay shareholders a half-yearly and annual dividend. In this scenario, you would use the combined value of the dividends to calculate the investment yield.

For example:

Share price: £2

Combined dividend: 20p per share (gross)

Investment yield: 10% (gross)

Your tax rate will directly impact the net rate. Therefore, if you pay a tax of 20% on dividend payments, the net figure would be 16p per share. This equates to an 8% dividend yield net of tax, called the running yield.

It is important to compare like for like, which is only possible by calculating the dividend yield on the current share price. However, it may be interesting to look back at the dividend yield on your original purchase price for information purposes. For example, if you acquired the above shares at £1, then a 20p dividend equates to a 20% gross dividend yield, falling to 16% after-tax of 20%. Very impressive!

## Property investment

Since the 1980s, we have seen significant investment in the UK buy-to-let market, which has created many private landlords. While, on the whole, property prices have risen significantly since the 1980s, many people focus on the rental yield associated with a property. This gives you an indication of the annual income you can expect based on rental payments.

For example:

Property value: £200,000

Rental income: £10,000

Investment yield: 5% (gross)

If you were to pay £2,000 tax (20% rate) on the rental income, this would reduce the net rental income to £8,000. This equates to a 4% net investment yield. However, with property, there will likely be additional costs to consider.

To simplify the situation, let’s assume that you spend on average £2,000 a year on the repair and maintenance of your buy-to-let property. You should deduct this from your rental income, which would fall to a gross of £8,000 or a 4% gross yield. If you then remove tax (at 20%) of £1,600 from the adjusted gross income figure, this equates to a net rental income of £6,400. Consequently, the investment yield falls to a net 3.2%.

## Capital gains

Not all investments will create a regular income stream, with many focused on capital gains. Therefore, it can be helpful to calculate ongoing capital performance. For example, if the value of your investment doubles within 12 months, the annual investment yield is 100%. This is the gross yearly investment yield and would reduce after deducting any capital gains or income tax.

Calculating capital gains and income expressed as a percentage of the base asset price gives a more accurate overall performance assessment.

## Compare and contrast investment yields

An investment yield predominately focuses on regular income streams, offering a helpful way to compare and contrast like-minded investments. Where an investment is more focused on capital gains, the dividend yield alone will not reflect the overall returns. This is where it may be helpful to express the change in capital value over the year as a percentage of the base value. Combining the two figures will reflect the overall performance more fairly when an investment offers income and capital appreciation. Maybe not as simple as you first assumed!