There are two primary ways of determining yields: the distribution yield and the SEC yield. It’s helpful to know how each type of yield is calculated so that you can use both of them to get a better sense of your return.
What Is the Distribution Yield?
The distribution yield—also known as the “trailing 12-month yield” or “TTM”—is calculated by comparing a fund’s distributions in the previous 12 months to the fund’s net asset value (NAV) at the end of that 12-month period.
Variations on the Distribution Yield Calculation
Not every fund, analyst or website calculates the distribution yield in quite the same way. Some will take the most recent dividend distribution and multiply it by 12 to average out the year’s worth of dividends. Averaging out the 12-month yield based on the most recent dividend is much easier than digging up every dividend and calculating the exact figure. It can quickly give you an idea of the yield, but it’s often a rough—and inaccurate—estimate of the annual return.
Three Issues With Assumption-Based Yield Calculations
The first and most obvious issue is the often-inaccurate assumption that the income over the last 30 days multiplied by 12 equals the 12-month return. In many instances, this is a reasonably close approximation of the actual 12-month return. At other times, however, the calculated average income and the actual income may be quite different. The second assumption is that the current NAV represents the average NAV over the past 12 months. While bond funds are less volatile than penny stocks, there will be an element of volatility and price movement with any investment—even bond funds. The third assumption that may compromise the distribution yield calculation’s accuracy is that the simplified version doesn’t account for the various lengths of the months. If you calculate the return at the end of February, you’re using a 28-day distribution period. If you calculate it in July, you’re using a 31-day period. The difference can skew your result, though it may not be the most consequential of the inaccuracies.
What Is the SEC Yield Calculation?
To address the issue of various distribution yield calculations, the SEC yield was created by the Securities and Exchange Commission as a market-wide standard. Companies must use this calculation when reporting yield information to the SEC. The actual SEC yield formula is a bit complicated, but in simplified terms, the SEC yield is calculated by dividing the previous 30 days’ worth of income by the best share price on the last day of the period. The SEC yield isn’t perfect, but it has one clear advantage over other yield calculations—it is standardized and allows investors to compare apples to apples. The full calculation accounts for small details, such as management fees, expenses, waivers, and reimbursements of the fund. It also assumes that each bond in the fund will be held until maturity and that all income will be reinvested. However, depending on the type of fund, those assumptions might not be accurate. For example, actively managed funds are more likely to trade bonds, while passively managed funds are more likely to hold them to maturity.
Using Both Yield Calculations
While it’s important to understand the differences, an investor may find it advantageous to consider both yield calculations. You should be able to find both calculations on the fund’s website or a fund screening website. By considering both, you may give yourself a more complete view of the fund. In general, the distribution yield can be used as an estimate of how the fund will affect your portfolio in the long term. The SEC yield, on the other hand, gives you more recent and targeted data, which could help you get a better sense of the short-term performance and regular income of the fund. By using both measurements in conjunction, investors may be able to buy funds that are likely to offer steady income and long-term stability.
