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What is average annual yield?
Average annual yield is the income of an investment divided by the age of the investment. Such investments can be deposit accounts someone holds with her bank, shares of stock, or assets like commodities or real estate. The average annual yield is calculated by comparing rates of return over two or more years.
Any time someone invests money, she wants a return on her investment. The return, as as calculated over the course of the investment’s lifetime, can be expressed as an average annual yield.
On any multiyear investment, the average annual yield will determine the asset’s performance over time.
Comparing average annual yields can help the typical investor make smart investment decisions for her portfolio. Some investments may perform better than others, which is true not only among different asset classes but even among the same asset class. The average annual yield is calculated after adding up all income associated with the investment, including interest and dividends.
Because an asset’s value may fluctuate, the average annual yield is key when an investor decides to diversify her portfolio. An investor will want to reduce her investments in assets that have lower yields in favor of those with higher yields, and the average annual yield gives her a more thorough picture than a simple snapshot of a period of time.
Average annual yield example
Joan has a portfolio of stocks that she’s monitoring. She looks at the shares of stock she has for the Green Calf energy drink company and see that that year’s rate of return was about $500. On a $5,000 investment, that means her annual rate of return was 10 percent. Last year, the same investment yielded $100, and $250 the year before that, respectively earning 2 percent and 5 percent rates of return. Her average annual yield on the stock is 5.67 percent.