How much yield you earn from a fund is important. But calculating it can be tricky.
In basic terms, a fund's yield is whatever the dividend or interest payment is divided by the current price. If the annual dividend is $1 and the price of the fund is $20, then the yield is 5%.
But as with most things, it's rarely that simple. That's because fund investments and payouts change over time. So, savvy investors should look at different ways of measuring yield. In simple terms, here's what you need to understand.
12-Month YieldThis looks at the total dividends and interest paid over the prior year and compares that with the current price of the fund. The beauty of this measure is that it uses what was actually paid out. But it has some limitations.
"People have to be really careful buying a fund based on a history when that isn't necessarily what you will get in the future," says Ron DeLegge, founder of ETFGuide.com. The 12-month yield, for instance, is calculated based on investments that could have been sold many months ago. It tells you little about the current likely yield or what to expect going forward.
SEC YieldSEC yield measures what the investments in the mutual fund or exchange-traded fund paid in dividends or interest over the past 30 days and annualizes that yield. Some websites, like Morningstar.com, update SEC yields monthly, but fund companies may do it more frequently.
It is a measure that "works well for fixed-income funds but less so for equity funds," says Timothy Strauts, an ETF analyst at Morningstar Inc. "We tend to avoid SEC yields for equity funds."
The reason is funds that own stocks tend to have lumpy payouts, with bigger payouts near the end of the year or quarter. This tends to distort the SEC yield. With bond (fixed-income) funds it's usually less of a problem since they tend to have relatively even monthly distributions.
One thing you shouldn't do, says Mr. Strauts: annualize the latest fund dividend. This can be very misleading when applied to funds that have erratic payouts, he warns.
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