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What is Yield Advantage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 September 2016
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    Conjecture Corporation
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The yield advantage is an essential tool in understanding the relationship between the convertible securities that are in the possession of a corporation and the amount of dividend yield on the common stock issued by the company. By comparing the two factors, it is possible to determine if the corporation is choosing a wise financial path by holding on to a convertible security rather than exchanging the convertibles for more shares of the stock. Many companies employ the calculation of the yield advantage on at least a quarterly basis.

Any corporation that wishes to remain stable will seek to make the most profitable use of available resources. This may involve owning more shares of common stock instead of securing convertible securities. When the yield for all investments is calculated by subtracting the dividend yield on common stock from the yield on the convertibles, it is possible to determine if the ratio between the two assets is indeed within a desirable range.

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The yield advantage can fluctuate based on a number of factors. When the value of the common stock experiences a sharp increase, this will impact the balance that many companies choose to maintain in their investment strategy. Calculating the yield advantage helps to demonstrate whether or not those same economic indicators that created the upswing on the common stock had a similar impact on the convertibles. If so, then the balance may remain within acceptable perimeters. If not, then the time may have come for making revisions to the portfolio.

Generally, a company does not want to depend too heavily on convertibles or common stock as a means of generating a return on investments. Diversifying the portfolio helps the company to weather adverse trends in the market. A shift in the yield advantage does not automatically necessitate that some action be taken, if economic indicators predict that applicable factors are short term. Still, calculating the yield advantage on a regular basis will provide valuable information that can aid in deciding whether or not changes are in order.

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