Yield Advantage

Yield advantage is the additional yield an investor can expect to earn by purchasing a publicly-traded company’s convertible securities instead of its common stock — or can continue to earn instead of converting the bonds into stock.

Yield advantage is the difference between the yield of a company's convertible bonds and the dividend yield of its common stock — and is generally widest when the convertible is issued and priced to attract investors. Historically, in the U.S., convertibles have been able to provide returns that are highly competitive with common stocks in average equity markets.

Investors buy convertible bonds to gain a higher current yield and less downside. They are safer because they rank ahead of the common stock in the pecking order should the underlying company go bankrupt — and they outperform in poor equity markets. But they can also provide upside should the underlying company be successful, and the bonds converted into equity.

This yield spread can help investors decide whether they should retain the convertible bond or exchange it for common stock. If the company prospers, the dividends on the underlying common stock could exceed the yield on the convertible.