Distribution Yield

What is a 'Distribution Yield'

A distribution yield is a measurement of cash flow paid by an exchange-traded fund (ETF), real estate investment trust (REIT) or another type of income-paying vehicle. Rather than calculating the yield based on an aggregation 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.

BREAKING DOWN 'Distribution Yield'

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 NAV to determine the distribution yield. For example, if a fund priced at $20 per share 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%. 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.

Capital Gains and Distribution Yield

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.

Special Dividends

The distribution of one-time special dividends can also 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.

Interest and Recurring Dividends

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.

Determining True Yield

Distribution yields generally provide a snapshot of income payments for investors, but the variables posed by capital gains distributions and special dividends can skew returns. To determine true yield, investors can total all distributions over the preceding 12 months and divide the sum by the NAV at that time.