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Y is for Yield – The Elite Investor Club’s A – Z of Investing


As we reach the penultimate episode I can’t believe how quickly we’ve raced through the A to Z of investing. But there are still two important topics to cover. Today, we’re looking at probably the most important attribute of any asset you own – the income it generates. Y is for Yield. It’s almost twenty years since Robert Kiyosaki published his seminal work, Rich Dad, Poor Dad, in which he taught that an asset is something that puts money in your pocket while a liability takes money out of your pocket. All these years later, ninety per cent of investors still don’t get it. They buy stocks and shares with no view towards dividend income, just hoping the share price will go up. They own buy to let properties that are cash flow neutral, sometimes even negative, because they accept what the so called gurus tell them about property prices doubling every seven years. That may have been true for a couple of decades but in the long run property just keeps pace with inflation. You just need to look at the demographics of most western countries to see why residential property is unlikely to keep shooting up in value. As the baby boomers reach their seventies they are downsizing or dying, while a smaller next generation cannot absorb all the property that will come on the market. The result can only be downward pressure on prices. Yield is usually expressed as a percentage, and measures the income that you achieve from the asset relative to what you paid for it. So if you invest a hundred thousand pounds and receive ten thousand pounds a year, that’s a yield of ten per cent. Of course you then have to think about gross yields and net yields. If you pay four hundred thousand pounds for a two bed flat in outer London, it might achieve a rental of fifteen hundred a month or eighteen thousand a year. That may look like a yield of four point five per cent, but that’s a gross yield. What matters is the cash you can take out of the property each year. So you have to deduct the mortgage payments, the agency fees which can be fifteen per cent, maintenance costs, void periods in between tenants and all the rest of it. Then, if there is any profit, you have to pay tax on it. Factor in George Osborne’s latest tax hike for buy to let landlords and you can see why a positive yield will be hard to find. Up to now, most of the buy to let landlords I know have rationalised all this pain and cost by focusing on long term capital gains. My concern is, you can’t rely on capital gains and you certainly can’t eat capital gains. Try paying your for your groceries at the supermarket with the future equity in an investment property. Let me repeat one of the mantras of the Elite Investor Club. Financial independence is all about building a portfolio of income generating assets that enable you to live the lifestyle you want on your terms. To work as much or as little as you choose. To be selective about the clients you work with and the projects you work on. To achieve this, one of the most important metrics you should focus on is the overall yield from your portfolio. If you stopped working tomorrow how much passive income would your investments generate in the next twelve months? I suspect it may currently be a small number. I urge you to start looking at dividend paying shares, high yield bonds and commercial property such as care homes to increase the income from your capital. If you’re in the accumulation phase of wealth creation you can reinvest this income into more assets and achieve a compounding effect. If you’re winding down into retirement you can start using that income to live on without impacting your capital. One word of warning. As a general rule, the higher the apparent yield from an asset, the higher the potential risk. If a company pays a fifty pence dividend when its share price is ten pounds, that’s a five per cent yield. If its share price halves, you suddenly have an amazing ten per cent yield. But why has the share price halved? You still need to do your due diligence and make sure you are comfortable holding each investment. But make sure that the first thing you look for when you evaluate new investments is – how much will this put in my pocket? What’s the yield? Here’s a simple acronym to help you remember – YIELD stands for Yes I’m Earning Lots of Dosh.