What is distribution yield (short answer)
– Distribution yield is an annualized measure of cash paid by an income-producing investment (for example, an exchange-traded fund—ETF—or a real estate investment trust—REIT). It takes the most recent cash distribution, scales it up to a 12‑month equivalent, and expresses that annualized amount as a percentage of the fund’s net asset value (NAV) or share price at the time of the payment.
Key definitions (first time jargon used)
– Distribution: a cash payment from a fund or company to investors (can be interest, regular dividends, or a capital gains payout).
– Net asset value (NAV): the per‑share value of a fund’s assets minus liabilities; effectively the price used to calculate per‑share yields for funds.
– Capital gains distribution: a payment to fund holders representing realized trading profits; often paid annually and may be categorized as long‑term or short‑term gains.
– SEC yield (30‑day yield): a standardized annualized yield calculation required by the U.S. Securities and Exchange Commission for bond funds that is based on the most recent 30 days and incorporates fund expenses.
How distribution yield helps (and its limits)
– Use: It gives a quick snapshot of current cash flow potential from an income vehicle and is useful for comparing near‑term income between funds or income strategies.
– Main limitation: Because it annualizes a single most‑recent distribution, one unusually large or small payment (for example, a one‑time special dividend or a capital gains check) can make the yield misleading relative to what investors actually received over a full year.
– Better accuracy: Summing all distributions paid over the trailing 12 months and dividing by NAV gives a yield that avoids single‑payment distortion.
Step-by-step: calculating distribution yield
1. Identify the most recent cash distribution per share (D_recent).
2. Annualize that single payment by multiplying by 12: D_annual = D_recent × 12.
3. Find the NAV (or share price) at the time the distribution was paid (NAV).
4. Compute distribution yield = D_annual / NAV.
5. Express as a percentage: Distribution yield (%) = (D_annual / NAV) × 100.
Checklist before you rely on a distribution yield
– Check whether the most recent distribution includes a special (non‑recurring) dividend or a capital gains payment.
– Compare the single-payment annualized yield against the trailing‑12‑month (TTM) total distributions ÷ NAV.
– Review the fund’s distribution history (monthly/quarterly/annual) to see variability.
– If evaluating bond funds, compare the distribution yield with the fund’s SEC (30‑day) yield.
– Confirm whether yields are reported before or after fees and taxes.
Worked numeric example
– Suppose a fund’s recent monthly distribution was $0.08 per share and the NAV at that distribution date was $20.00.
– Annualize the single payment: 0.08 × 12 = $0.96.
– Divide by NAV: 0.96 ÷ 20.00 = 0.048.
– Convert to percent: 0.048 × 100 = 4.8% distribution yield.
How capital gains and special dividends affect the metric
– Capital gains distributions (often annual) can be much larger or smaller than routine interest or