From time to time, I get feedback from readers wondering why the yields listed on one financial website can be entirely different from the figures given on another.
This discrepancy is annoying -- and for novice investors it can be truly puzzling. If one source claims a fund has a payout of 8% and another says 6%, which do you trust?
Part of the problem stems from the fact that there is no standardized calculation. Some companies prefer to use trailing distributions made during the past 12 months. Others believe that the next 12 months are what matter most, so they annualize the current payment.
But even when the approach is uniform, there is still some confusion. Most investors prudently count dividends and interest as income. However, others include capital gains distributions, which artificially inflate the number and should be treated separately. Realized gains vary greatly from year to year, so it's best not to count on them as regular recurring income. All things equal, I prefer to avoid funds with outsized capital gains distributions for the sake of tax efficiency.
Perhaps the most misleading are yield quotes based on managed distribution policies, which include income, gains and potential returns of capital. A fund could boast a 10% payout, but actual investment income might only add up to half that -- be cautious of these fictitious yields.
To clear up the confusion and help investors make informed, apples-to-apples comparisons, the Securities and Exchange Commission (SEC) came up with the 30-Day Yield. This number is simply calculated by annualizing the net dividends and interest earned by a fund's holdings during the past 30 days, multiplying by 12 and then dividing by the total assets in the portfolio.
It's always a good idea to glance at a fund's 30-Day SEC Yield to see if it's actually pumping out enough income to cover its monthly or quarterly distributions. If each dollar of assets is churning out a nickel of income per year, then we know that a fund with a 5% payout is in fine shape. But if each dollar is only squeezing out a penny, then you have to determine how the gap is being filled.
As an example, let's consider the iShares Dow Jones U.S. Real Estate Fund (NYSE: IYR). The portfolio of REITs has a net asset value of $3.15 billion. These holdings have dished out net distributions of $10.6 million during the past month. If the current pace continues, they would distribute $126.7 million over a full year -- for a 30-Day SEC Yield of 4.0%.
Keep in mind, what a fund can pay and what it does pay are often two different things -- so the yields you'll see listed can be higher or lower than the 30-Day SEC Yield. In this case, the last quarterly payment was a distribution of $0.4889 per share in late March. That equates to approximately $1.95 per year, for a yield of 3.7%.
Clearly, IYR brings in ample portfolio income to support its quarterly payments -- but many other funds are facing a deficit. And thanks to the 30-Day SEC yield, you'll be able to separate the weak from the strong.
