Which is better for income: A CD paying 5% or a fund yielding 4.83% and growing @ an average of 5% per year? Would I be better off putting my money in the fund and drawing out 5% per year (my income) ? The fund expense ration is .44%.
Am I missing something here are is this a no brainer to use the fund?
Is the 4.83% yield of the fund sure, or just expected? Also, is the
4.83%yield net of expenses, or gross? If 4.83% is the net yield and as safe as the 5% yield of the CD (i.e., you apply the same discount rate to the two streams of income), then the net present value of the fund is higher than the net present value of the CD if you plan to hold both investments for 3 years or more.
The fund's a no brainer: Its principal keeps up with inflation (at least, as inflation is conventionally measured) while you still get around 5% income from it each year.
For my edification, please explain those terms with respect to the fund. I thought "yield" and "growth" were almost synonyms, except that in this context, 4.83% might be the 7-day yield, whereas 5% might be an historical average over some (how many?) months or years.
In any case, I could not answer the question without knowing the volatility (std dev) of the fund growth rate, what the fund invests in, your tolerance for risk, and your time horizon. Also, is the CD rate fixed or variable?
The correct answer depends on individual factors that you have not even hinted at. Obviously if you depend on 5% per year income from these funds, the CD is not an option, no matter how the yields compare. Most CDs do not allow you to make withdrawals (without penalty) until maturity. (Exceptions are made for RMDs from Traditional IRAs.) But that does not necessarily make the fund your "best" option.
Not in the stocks and funds world. At its simplest, yield is dividends divided by price. Growth is increase in price. And total return is yield plus growth. (The math's actually a bit more complicated than that, but that states the fundamental concepts well).
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.