Another important priciples of investment is Income Yield. It can be considered as investor's main criterion in choosing an investment.
As was mentioned in investment security, the greater the risk, the greater the income or yield. And the opposite is true too. This, therefore, is usually the deciding factor as greater income yield mean greater risk too.
For income yield, it is prudent to remember a few points:
This chart proved that dividend might not the only way for income yield.
- Inflation : It is important for investors to ensure that the return is as much as , if not greater than, the rate of inflation. Otherwise there will be a steady deterioration of capital. Especially so if one spends more than the income received. From this point of view, bank deposits though very safe are the worst type of investments one can make. The maximum return that one will receive on fixed deposit is roughly 3% per annum depend on the country lending rate policy, but it is very common that the real rate of inflation is more than 3% per annum.
- Appreciation : Sometimes income is not the objective of the investment. Investor may believe that the investment would appreciate in value. The yield or return in this case is received when the asset is sold. For instance, some stock might not give good income yield by distributing good dividend, but the stock value keeps growing and appreciate. When the investors sell that stock, he/she will gain the capital gain. Some concept applies to real estate. Some real estate might not provide good rental, but the value of the real estate will appreciate by years.
To conclude, it is important that the investor need to ensure the income is greater than the inflation but the investors should not neglect the possibility for good appreciation for low income yield investment as well.