Calculating the yield advantage helps companies determine if holding onto convertible securities is a wise financial decision. It compares the dividends from common stock with the yield on convertibles and can indicate if portfolio revisions are necessary. Diversifying the portfolio helps overcome adverse market trends.
The yield advantage is an essential tool for understanding the relationship between the convertible securities held by a corporation and the amount of dividends from the common stock issued by the company. By comparing the two factors, it is possible to determine if the corporation is choosing a prudent financial path by holding on to a convertible security rather than exchanging the convertibles for more shares. Many companies use the performance advantage calculation at least quarterly.
Any corporation wishing to remain stable will seek to make the most profitable use of available resources. This may involve owning more common stock rather than securing convertible securities. When the return on all investments is calculated by subtracting the dividend yield on common stocks from the yield on convertibles, it is possible to determine whether the ratio between the two assets is actually within a desirable range.
The performance advantage can fluctuate based on a number of factors. When the value of common stocks rises sharply, this will affect the balance that many companies choose to maintain in their investment strategy. Calculating the yield advantage helps show whether those same economic indicators that created the rally in common stocks had a similar impact on convertibles. If so, then the balance can remain within acceptable perimeters. If not, it may be time for portfolio revisions.
In general, a company does not want to be overly reliant on convertibles or common stocks as a means of generating a return on investments. Diversifying the portfolio helps the company overcome adverse market trends. A change in performance advantage does not automatically require action if economic indicators predict the applicable factors to be short-term. Still, calculating the performance advantage on a regular basis will provide valuable information that can help decide if changes are in order or not.
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