Is maximising yield always the right thing?

In business, yield is one of those words that seem to crop up all over the place and with a thousand different variations - gross yield, net yield, cost yield, nominal yield, etc. Of course, there is a second definition which means giving way, surrender, capitulation, or resignation.

For this blog I want to focus on the first type of yield but rather than look at it from a purely business or mathematical perspective, I’ll try and take it to the next level to look at the wider impact of maximising yield.

As most of you know I’ve been investing in property since 2002 and when I evaluate a new or existing investment one of the Key Performance Indicators (KPIs) I’ll look at is yield. So what does yield represent in this context? Simply put yield is a measure of what you get out divided by what you put in.

For example, if I buy a property for £100,000 and rent it for £750pm my Gross Yield is 9%pa. Using the gross figures the calculation looks like this:

What I get out / what I put in x100

• £9,000pa (12 x £750) / £100,000 x 100 = 9%pa

However, if I buy using a 70% mortgage costing £450pm my Net Yield is now 12%pa. In this instance I use the net income of £300pm (£750 - £450) divided by the capital at risk of £30,000 (£100,000 - £70,000).  Now my calculation looks like this:

• £3,600pa (12 x £300) / £30,000 x 100 = 12%pa

Different types of investment use different measures of yield but by comparing these figures for each opportunity I can quickly identify the best yields as well as the impact of leverage or the cost of borrowing. Of course, the calculator takes no account of risk, risk mitigation, risk management, liquidity, exposure, asset allocation, exit strategies etc. These need to be carefully balanced for each person, business or situation.

However, a focus on yield alone can lead to other unexpected consequences. In our pursuit of yield we may adversely impact our market and our potential tenants. In other words, fairness and a sense of responsibility to the wider world can fall victim to the pursuit of ever higher yields. 

And higher yields themselves can quickly draw our attention from the straight and narrow. An extreme example would be the National Lottery - Lotto; the yield on a £10,000,000 win for a £2 ticket would be 50,000,000% but the odds (or risk ratio) are 45,000,000:1. Hey, but it's only £2.

When trying to explain the importance of a holistic approach to yield I sometimes use the following analogy based on a close relationship. Imagine you find yourself in a high-yielding personal relationship with your partner. Why high yielding? Because you realise that you are getting a great deal from the relationship without having to put too much in yourself. 

It sounds perfect; you really don’t have to try too hard. But what if you now flip the equation and look at it from your partner’s perspective? Perhaps from their point of view they are putting a great deal into the relationship but getting much less out. How will that make them feel? Do you think the relationship is sustainable over the long term?

I hope the point is made; yield is a great tool for comparing opportunities or even different types of investment using a standard basis but it is not without risks and they must be evaluated and weighed in the balance. 

Wherever possible we should also seek to understand the impact our desire for high yield is having on the wider world and those on whom we depend. When we do we are better placed to find the opportunities that can serve all of us over the longer term.