Rate of Return on Investment

The final, and most practically important, question an investor asks is not 'what is the dividend rate' but 'what return am I actually earning on the money I put in' — and these two numbers can differ substantially whenever a share is bought at a premium or a discount rather than at par.

Because dividend/interest income is computed on face value while the investment made is computed on market value (plus brokerage), the rate of return equals the nominal dividend/interest rate only in the special case where the share/debenture is bought exactly at par with zero brokerage; buying at a premium always pulls the actual return below the nominal rate, and buying at a discount always pushes it above the nominal rate — brokerage, being a real added cost, always pulls the return down slightly further still, whichever side of par the purchase price sits on. …