What is the Distribution Yield?
The distribution yield – also known as “trailing twelve months” or “TTM” – is calculated by comparing the distributions of the investment fund over the past 12 months to the net asset value of the fund at the end of that 12-month period.
Variations in Calculating Distribution Yield
Not every fund, analyst, or website calculates the distribution yield in the same way. Some may take the latest dividend distribution and multiply it by 12 to obtain an average annual yield. Calculating the average yield over 12 months based on the latest dividend distribution is much easier than researching every distribution and calculating the exact figure. It can give you a quick idea of the yield, but it is often a rough estimate of the annual yield.
Three Issues with Assumption-Based Yield Calculations
The first and most obvious issue is the inaccurate assumption that the income over the past 30 days multiplied by 12 equals the yield over 12 months. In many cases, this approximation is close to the actual 12-month yield. However, sometimes the calculated average income and the actual income can be completely different.
The second assumption is that the current net asset value represents the average net asset value over the past 12 months. Although bond funds are less volatile than small-cap stocks, there is an element of volatility and price movement in any investment – even bond funds.
The third assumption that might affect the accuracy of the distribution yield calculation is that the simplified version does not account for the varying lengths of different months. If you calculate the yield at the end of February, you are using a 28-day distribution period. If you calculate it in July, you are using a 31-day distribution period. The difference can affect the final result, although it may not be the most impactful difference.
What is the Security Yield Calculation of the Security and Exchange Commission?
To address the issue of different distribution yield calculations, the Security Yield Calculation of the Securities and Exchange Commission was established as a standardized benchmark in the market. Companies must use this calculation when providing yield information to the Security and Exchange Commission.
The security yield formula is not perfect, but it has one clear advantage over other yield calculations – it is standardized and allows investors to compare yields more generally.
The full calculation takes into account small details, such as management fees, expenses, waivers, and compensations for the fund. It also assumes that every bond in the fund will be held to maturity and that all income will be reinvested. However, these assumptions may not be accurate depending on the type of fund. For instance, actively managed funds may trade bonds more often, while passively managed funds may hold them until maturity.
Using Both Yield Calculations
Despite the importance of understanding the differences, investors may find it useful to consider both yield calculations. You should be able to find both calculations on the fund’s website or a fund screening site. By looking at both, you may give yourself a more complete view of the fund.
Note: Neither the distribution yield nor the security yield of the Security and Exchange Commission can tell you how much income a bond fund will produce from the time you buy it until you sell it. Bond funds are subject to risks, including interest rate risk and credit risk.
Overall, the distribution yield can be used as an estimate of how the fund may impact your portfolio over the long term. On the other hand, the security yield from the Security and Exchange Commission gives you more recent and guiding data, which can help you get a better idea of short-term performance and the fund’s regular income. By using both metrics together, investors may be able to buy funds that are likely to provide stable income and long-term stability.
Questions
Repeated
What is a good security yield?
Yields fluctuate constantly and depend significantly on the broader market in which they are traded. A good security yield today might not be a good security yield in two months. A good security yield for a Treasury bond may not be the same as a good security yield for a real estate investment trust (REIT). To get an idea of what to expect from your investments, look at an index that tracks the target market. For example, you can get an idea of the average yield across the entire bond market by looking at the yield of the Bloomberg Barclays U.S. Aggregate Bond Index. (You can also use the yield of an exchange-traded fund that tracks the index.) If an individual bond has a yield higher than the index, it may be considered a “good” yield, but you should take into account the risks associated with higher yields.
What is dividend yield?
Dividend yield is the same as distribution yield. The difference in terminology arises from the fact that the income of a mutual fund is generally referred to as “distribution,” while the income of stocks is called “dividends.” To calculate the dividend yield, sum the total annual distribution of dividends in dollars and divide it by the stock price.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editing process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Schwab Streets. “What is your fund’s yield?”
Investor Education and Advocacy Office. “Exchange-Traded Funds (ETFs).”
Investor Education and Advocacy Office. “Bond Funds and Income Funds.”
Source: https://www.thebalancemoney.com/distribution-yield-vs-sec-yield-which-should-you-use-416978
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