Anyway, back to the point, what do yields tell you about an investment?
Well, in the good old days, the yield of a stock, bond or cash was a good indicator for investors about the relative risk of an investment.
That's providing it was deemed to be an income producing investment. It works slightly differently for growth investments.
You could line up the yields of a few stocks, a government bond, a corporate bond and cash, and quickly see which was the safest and which was the least safe.
Of course, it wasn't foolproof. But it was a useful guide. You could see that a dependable old utility company offered a decent dividend yield - but not much growth - but that it wasn't as dependable as a government bond.
So the government bond would have a lower yield because it was seen as more secure. A corporate bond would yield something in between - all else being equal - the government bond and the share dividend yield.
It was riskier than the government bond, but less risky than the shares, because debt holders take precedent over share holders in the event of a company being wound up.
Then separate to that, you had companies that were priced for growth. That doesn't mean to say they didn't pay a dividend, but rather that the dividend was a bonus. Growth was the key.
Growth investments
Resources and technology companies are perfect examples of that.
But what determines the difference? At what point can you tell whether an investment is priced for growth and when it's priced for income?
Well, it's not as hard as it seems. Let's get the simple one out of the way first. If the stock or investment doesn't pay a dividend then it's priced for growth. It's as simple as that and therefore we can ignore it for the rest of this argument.
But what about investments that do pay a dividend? A good example to illustrate this is BHP Billiton Ltd [ASX: BHP]. The stock trades for around $41 and based on the last two dividend payments pays a yield of 2.8%.
So how do we know it's priced for growth rather than income? The simple way of looking at it is to compare it to what they used to call the 'risk free' interest rate. In other words, the central bank rate.
The current Reserve Bank of Australia (RBA) cash rate is 3.75%. That's the rate at which the banks can borrow money from the central bank overnight.
Then you can go one step further to look at government issued bonds for a one month maturity. The latest issue by the Australian Office of Financial Management (AOFM) for bonds that will mature on February 26 is for a yield of 3.864%.
And for a 10-year bond the recent tender produced a yield of 5.6316%.
For an investor you can make a good case to argue that's the gross yield, and if we take into account costs, but ignore tax, then the net yield is roughly the same...
Look, I know it's not the real net yield. The real net yield would factor in tax as well. But let's keep this simple for now. You know your editor doesn't like to over-complicate things!
Therefore, we can compare the yield on a government bond - 5.6316% - with the yield for BHP Billiton - 2.8% - and say that if an investor was interested in income then they would invest in the government bond because it pays a higher yield.
So, because BHP Billiton is a higher risk than the government, but it's yield is lower, then BHP Billiton must be priced for growth.
In other words, if it was priced for income, the yield would have to be higher (and therefore the share price lower, if the dividend was unchanged) than the yield for a 'risk free' government bond.
Still with me?
The distortion of yields
However, the situation with another asset class is quite interesting. That asset class is housing. But I'll get on to that in a moment, because first I want to look at the infrastructure funds that were devised under the so-called 'Macquarie Model.'
Back when we started writing for our sibling publication The Daily Reckoning in 2005 we questioned the sanity of investment advisers and commentators who sang the praises of the Macquarie Model of infrastructure funds.
It just didn't make sense to us that professional investment advisers were telling their clients they could get both growth and income from buying into toll roads and other infrastructure assets.
Furthermore, these investments were labelled as "reliable" and "secure" and "dependable", ideal for a superannuation fund.
As investors bought in the share prices climbed higher. That you would think should cause the yield to fall. But it didn't. First of all, it wasn't called a dividend, because dividends are paid from profits. Many - but not all - of these investments didn't have real profits so they had to be called distributions.
The distributions climbed because of a clever accounting trick. The funds could revalue the assets higher, book the revaluation as a profit and then pay out a bigger dividend, er, I mean distribution.
They were simply borrowing against future forecast cash flows in order to pay out an income stream today. That scam fell in a heap. Recent headlines in the press have highlighted how toll road investors have been stung with billions of dollars of losses - all from the same reliable, secure and dependable investments.
The point is, investors were fooled by the experts into believing that things were different and that a big dividend income and big capital growth were possible from the same investment.
I'm not saying that income and growth are mutually exclusive, but typically you won't find huge capital gain potential plus a massive income stream from the same investment.