Distribution Yield: What It Is, How It Works, and Real-Life Examples

A distribution yield is the measurement of cash flow paid by an exchange-traded fund (ETF), real estate investment trust, or another type of income-paying vehicle. Rather than calculating the yield based on an aggregate of distributions, the most recent distribution is annualized and divided by the net asset value (NAV) of the security at the time of the payment.

Distribution yields can be used as a metric for cash flow comparisons for annuity and fixed income investments, but basing the calculation on a single payment can distort the actual returns paid over longer periods.

The calculation for distribution yields employs the most recent distribution, which may be interest, a special dividend, or a capital gain, and multiplies the payment by 12 to get an annualized total. The annualized total is then divided by the net asset value (NAV) to determine the distribution yield.

While this metric is often used to compare fixed income investments, the single-payment calculation method can potentially extrapolate larger or smaller-than-normal payments into distribution yields that do not reflect the actual payments made over the trailing 12 months or another representative period of time.

The distribution of one-time special dividends can skew distribution yields higher than actual returns. When a non-recurring dividend is paid by a company in a fund’s portfolio, the payment is included with the recurring dividends for that month. A yield calculated on a payment including a special dividend may reflect a larger distribution yield than is actually being paid by the fund.

Yield calculations based on distributions composed of interest and recurring dividends are generally more accurate than those using one-time or infrequent payments. The exclusion of non-recurring payments, however, can result in a distribution yield lower than the actual payouts during the preceding year.

Mutual funds and ETFs usually issue capital gains distributions on an annual basis. These distributions represent the net trading profits realized during the year, which are divided into long-term and short-term gains. A distribution yield calculated using either of these payments has the potential to reflect an inaccurate annualized return.

For example, calculating the yield based on a long-term capital gain distribution greater than monthly interest payments results in a distribution yield higher than the amount paid to investors over the preceding year. On the other hand, a calculation using a capital gains distribution less than monthly interest payments results in a lower-than-actual distribution yield.

Investors often consider and compare the SEC yield, also known as the 30-day yield, with distribution yield while making an investment decision. While both estimates are estimates of bond returns, they are calculated differently. The SEC yield is an annualized figure based on returns over the most recent 30-day period. As outlined above, distribution yields are calculated taking into account returns over a 12-month period.

Opinions between analysts and investors are split over which yield is better to evaluate investment returns. Proponents of the SEC yield point to the fact that calculations for distribution yield vary between bond funds, making it an unreliable indicator of performance. Meanwhile, calculations for the SEC yield are standardized and determined by a centralized agency. Because it is based on yields from trailing periods, the distribution yield is also considered to be an inaccurate representation of current economic circumstances. According to Vanguard, the SEC yield approximates after-expenses yield an investor would receive yearly assuming bonds are held till maturity and income is reinvested.

But bonds are rarely held till maturity by a majority of investors. For the most part, they are traded in the open market where conditions are constantly in a state of flux due to external circumstances. In a 2008 note discussing the importance of bond yields, research firm Morningstar made the case that 12-month yields offer a “more accurate picture” than the SEC yield because it accounts for 12 distinct dividend payments reflecting the bond’s performance under a variety of different circumstances.

Suppose a fund is priced at $20 per share and collects 8 cents in interest payments during a month. The interest is multiplied by 12 for an annualized total of 96 cents. Dividing 96 cents by $20 gives a distribution yield of 4.8%.

Distribution yield provides investors with a measure of the income they can expect from an investment, such as an ETF or REIT, based on the most recent distribution. It helps in comparing the cash flow of different financial instruments.

Distribution yields can be skewed when special dividends or one-time payments are included in the calculation. This may lead to an overestimation of the actual returns received over a longer period.

SEC yield is an annualized figure based on returns over the most recent 30-day period, whereas distribution yield considers returns over a 12-month period. Investors often debate which yield is a better indicator of performance.