What Is a Distribution Yield?
A distribution yield is the measurement of cash flow paid by an exchange-traded fund (ETF), real estate investment trust, or another type of income-paying vehicle. Rather than calculating the yield based on an aggregate of distributions, the most recent distribution is annualized and divided by the net asset value (NAV) of the security at the time of the payment.
Key Takeaways
- Distribution yield is the calculation of cash flow for an investment vehicle such as an ETF or Real Estate Investment Trust (REIT).
- They provide a snapshot of yield available to investors from the given financial instrument. However, their calculation can be skewed by special dividends or interest payments.
- To calculate the distribution yield, the most recent distribution is multiplied by 12 to get an annualized total, which is then divided by the NAV.
Understanding Distribution Yields
Distribution yields can be used as a metric for cash flow comparisons for annuity and fixed-income investments, but basing the calculation on a single payment can distort the actual returns paid over longer periods.
The calculation for distribution yields employs the most recent distribution, which may be interest, a special dividend, or a capital gain, and multiplies the payment by 12 to get an annualized total. The annualized total is then divided by the net asset value (NAV) to determine the distribution yield.
While this metric is often used to compare fixed-income investments, the single-payment calculation method can potentially extrapolate larger or smaller-than-normal payments into distribution yields that do not reflect the actual payments made over the trailing 12 months or another representative period of time.
Calculating Distribution Yields
The distribution of one-time special dividends can skew distribution yields higher than actual returns. When a non-recurring dividend is paid by a company in a fund’s portfolio, the payment is included with the recurring dividends for that month. A yield calculated on a payment including a special dividend may reflect a larger distribution yield than is actually being paid by the fund.
Yield calculations based on distributions composed of interest and recurring dividends are generally more accurate than those using one-time or infrequent payments. The exclusion of non-recurring payments, however, can result in a distribution yield lower than the actual payouts during the preceding year.
Distribution yields generally provide a snapshot of income payments for investors, but the variables posed by capital gains distributions and special dividends can skew returns. To determine true yield, investors can total all distributions over the preceding 12 months and divide the sum by the NAV at that time.
Capital Gains and Distribution Yield
Mutual funds and ETFs usually issue capital gains distributions on an annual basis. These distributions represent the net trading profits realized during the year, which are divided into long-term and short-term gains. A distribution yield calculated using either of these payments has the potential to reflect an inaccurate annualized return.
For example, calculating the yield based on a long-term capital gain distribution greater than monthly interest payments results in a distribution yield higher than the amount paid to investors over the preceding year. On the other hand, a calculation using a capital gains distribution less than monthly interest payments results in a lower-than-actual distribution yield.
SEC Yield vs. Distribution Yield
Investors often consider and compare the SEC yield, also known as the 30-day yield, with the distribution yield while making an investment decision. While both estimates are estimates of bond returns, they are calculated differently. The SEC yield is an annualized figure based on returns over the most recent 30-day period. As outlined above, the distribution yield, on the other hand, takes the most recent distribution, multiplies it by 12 to get an annualized total, and then divides the result by the NAV.
Opinions between analysts and investors are split over which yield is better to evaluate investment returns. Proponents of the SEC yield point to the fact that calculations for distribution yield vary between bond funds, making it an unreliable indicator of performance. Meanwhile, calculations for the SEC yield are standardized and determined by a centralized agency. Because it is based on yields from trailing periods, the distribution yield is also considered to be an inaccurate representation of current economic circ*mstances. According to Vanguard, the SEC yield approximates the after-expenses yield an investor would receive yearly assuming bonds are held till maturity and income is reinvested.
But bonds are rarely held till maturity by a majority of investors. For the most part, they are traded in the open market where conditions are constantly in a state of flux due to external circ*mstances. In a 2008 note discussing the importance of bond yields, research firm Morningstar made the case that 12-month yields offer a "more accurate picture" than the SEC yield because it accounts for 12 distinct dividend payments reflecting the bond's performance under a variety of different circ*mstances.
Example of Distribution Yield
Suppose a fund is priced at $20 per share and collects 8 cents in interest payments during a month. The interest is multiplied by 12 for an annualized total of 96 cents. Dividing 96 cents by $20 gives a distribution yield of 4.8%.
FAQs
Distribution yield is the calculation of cash flow for an investment vehicle such as an ETF or Real Estate Investment Trust (REIT). They provide a snapshot of yield available to investors from the given financial instrument. However, their calculation can be skewed by special dividends or interest payments.
How is distribution yield calculated? ›
Calculating the Distribution Yield
The distribution yield equation makes use of the recent distribution and multiplies the amount by 12 to produce an average annual return. The annualized sum is then divided by the net asset value (NAV) at the end of the period to estimate the yield of the distribution.
What is yield calculation? ›
Yield (or net yield) should not be confused with total return, which is a more comprehensive measure of return on investment. Net yield is calculated as: Yield = Net Realized Return / Principal Amount. For example, the gains and returns on stock investments can come in two forms.
How are distribution rates calculated? ›
The Distribution Rate is based on the Fund's most recent monthly distribution per share (annualized) divided by the Fund's NAV or market price at the end of the period. The Fund's monthly distribution may be comprised of ordinary income, net realized capital gains and returns of capital.
How do you calculate distribution amount? ›
To calculate your required minimum distribution, simply divide the year-end value of your IRA or other applicable retirement account (such as a traditional 401(k)) by the distribution period value that matches your age on Dec. 31st each year.
What is a good distribution yield? ›
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
Is a distribution yield the same as a dividend? ›
There is a major difference between the distribution yield and the dividend yield. The dividend yield will show you the percentage of the share price an investor received as dividends. The distribution yield, on the other hand, includes two components: dividends and capital gains.
Is yield same as interest rate? ›
Yield is the annual net profit that an investor earns on an investment. The interest rate is the percentage charged by a lender for a loan.
Why do we calculate percent yield? ›
Percentage yield measures the effectiveness of a chemical reaction. It tells us how much of our reactants (in percent) successfully turned into a product.
What is the difference between distribution yield and SEC yield? ›
The trailing 12-month distribution yield can also differ from the 30-day SEC yield. Because the 30-day SEC yield always accounts for expenses, it is typically be lower than the trailing 12-month distribution yield. That's why it's important to make apples-to-apples comparisons when evaluating funds.
Total return, often referred to as "return," is a very straightforward representation of how much an investment has made for the shareholder. While the dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends, and increases in share price, among other capital gains.
What does distribution yield TTM mean? ›
Distribution yield, also known as Trailing Twelve Month (TTM) yield, is used in the context of mutual funds and Exchange-Traded Funds (ETFs). It is a backward-looking calculation that divides a fund's cumulative distributions over the previous 12 months by the fund's net asset value at the end of the period.
Is 30 day yield the same as dividend yield? ›
The 30-day yield is an SEC-standardized metric that helps bond fund investors compare assets. It's based on the most recent 30 days of income for a particular bond fund. This metric is different from the distribution yield, which is in no way standardized or regulated.
What does distribution amount mean? ›
Distributions Amount means the amount of any and all payments from the Company to Seller or Seller's Affiliates, including, without, limitation, any and all distributions or other payments declared, made or paid in respect of any of the Interests, in each case, after the Balance Sheet Date and on or prior to the Latest ...
What is the 12 month yield? ›
Also known as a distribution yield, Morningstar computes this figure by summing the trailing 12-month's income distributions and dividing the sum by the last month's ending NAV, plus any capital gains distributed over the same period.
How do you calculate distribution yield on a mutual fund? ›
The distribution yield of a fund is the sum of the trailing 12 months of income distributions divided by its current net asset value (NAV), adjusted upward for any capital gains distributed over the same time period.
What is the distribution yield of a bond? ›
The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months, as a percentage of the unit price. It is based on a snapshot of the portfolio.
What is the difference between distribution yield and 30-day yield? ›
The 30-day yield is sometimes referred to as the "SEC 30-Day Yield" or "standardized yield." Distribution Yield (Daily): This measure assesses the distributions made by a fund to its shareholders, and expresses this as a percentage of the fund's NAV.
What is the 30-day distribution yield? ›
The U.S. Securities and Exchange Commission (SEC) developed the 30-Day SEC Yield as a standardized method for comparing bond funds. It reflects the dividends and interest earned by a mutual fund during the most recent 30-day period after deducting expenses.
