Dividends: Distribution Yield vs. SEC Yield

by Michael on Feb 20, 2013 · 4 comments

Image of Percentages on Falling Dice

I recently looked up the yield on the Vanguard Intermediate-Term Tax-Exempt municipal bond fund and was surprised by what I saw.

According to Google, Yahoo, and Morningstar, it’s yield was a little over 3%.

Wait a minute… Over 3% for a tax-exempt bond fund? In the current interest rate environment? Really? Yes, really. Well, sort of. Not all yield estimates are created equally.

Upon further investigation, Vanguard was listing the yield as 1.57%. The difference? Both Google and Morningstar were reporting the so-called “distribution yield” whereas Vanguard was reporting the SEC yield.

Looking back with the distribution yield

The distribution yield is calculated as the total amount distributed over the past 30 days divided by the current net asset value (NAV) and then annualized.

In other words…

Divide the distribution amount by the NAV, multiply by 12, and then multiply by 100 to turn it into a percentage. Simple enough.

Note that it’s also possible to estimate the distribution yield over the past 12 months (sometimes referred to as the 12 month yield) in a similar fashion. In this case…

Divide the sum of the distributions from the past 12 months by the NAV and then multiply by 100 to turn it into a percentage. Again, pretty simple.

So, in both cases, the calculation is looking backward and focusing solely on the amounts that have been distributed relative to the current price. Not surprisingly, this isn’t a particularly good predictor of future returns.

Looking ahead with the SEC yield

The SEC yield is a bit more complicated, but the end result is a value that’s analogous to the yield-to-maturity (YTM) of an individual bond. In other words, the SEC yield gives you a more realistic estimate of total returns going forward.

Instances where the distribution yield is higher than the SEC yield are generally due to a fund holding bonds that are trading above par due to their higher-than-current yield. So yes, they’re currently paying out nicely, but that will be partially offset by a price decrease as they approach maturity.

In other words… If you’re looking to invest in a bond mutual fund and want to make an apples-to-apples comparison, you should focus primarily on the SEC yield when evaluating your options and setting your expectations.


{ 4 comments… read them below or add one }

1 Sylvia Vyskocil February 22, 2013 at 11:12 am

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2 Austintatious February 22, 2013 at 11:17 am

Michael,

Your blog is proving to be an excellent addition to my growing collection of excellent resources like Long-Term Returns, Oblivious Investor, the Finance Buff and Rick Ferri’s blog. Thanks very much for this service.

You said that the SEC yield is an estimate of total yield going forward. Can you offer insight into just how reliable a forecasting tool a current SEC yield for a bond fund ought to be considered, and why? You mentioned that the SEC yield is even more complicated that distribution yield, so I’m wondering how much one can reasonably rely on a current estimate.

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3 Michael February 22, 2013 at 12:57 pm

Sylvia: Thanks, that’s great to hear.

Austintatious: Thanks for your kinds words as well as the excellent question. The short answer is that I’m not 100% sure.

As I understand it, SEC yield should be a reasonable predictor of performance over the duration of the fund. To me, it’s probably most valuable in a relative sense. It provides a standardized measure of expected performance, so you can use it to make a fair comparison between two funds.

Said another way, if one fund has a higher SEC yield than another fund, then you can reasonably expect it to do better going forward. With distribution yield, that isn’t necessarily the case.

Hope this helps.

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4 Austintatious February 22, 2013 at 1:33 pm

It’s help enough. Thanks again.

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