Yield: Avoiding the Pitfalls of “Dreamworld Economics”

Published on: April 22, 2013

Filled Under: Blog, Financial Essentials, Frazer's Top Ten Financial Lessons

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In today’s highly uncertain times, yield is (or should be) highly valued by almost every investor. When investments have an identifiable and trackable yield, investors have more information to evaluate the potential of the investment.  When investors expect  payouts from investments, investments are viewed differently.  They go from being in the dreamworld of “what might be”, to the more solid footing of “what should be”.  Time frames are shorter and success is more easily defined.  The question of sales, market size, expense, and profit should have already been tested.  Investments without yield usually have open questions and therefore more risk.

This is appropriate for some investments.  Some businesses need every drop of capital to fuel growth , build infrastructure, or especially to thrive in fiercely competitive markets or in situations where the business has to disrupt a current conventional business wisdom.  Those investments demand investor patience and appetite for risk.  When things go horribly wrong, you lose.  However, when they go right, those investments should pay off handsomely for the investor.

Yield isn’t perfect.  It can be manipulated or misunderstood.  However, yield forces management to deal with investors.  It is quantifiable accountability.  It forces management to know where the next distribution is coming from and how the business (or other entity) is going to generate the necessary cash to pay its investors.  It is a useful, if flawed, shorthand for investment health and (frequently) a comparative advantage against competing investments. Especially now, yield deserves close attention from any prudent wealth manager or investor.

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