Key Takeaways
- Mutual fund yield measures income return from dividends and interest, expressed as a percentage of the net asset value (NAV).
- The SEC yield provides a standardized measure of income potential across funds, excluding capital gains.
- Mutual funds can offer both forward and trailing 12-month yield figures, depending on income distributions.
- High yields might involve greater risks, so investors should also consider total return and fees.
What Is Mutual Fund Yield?
Mutual fund yield measures the income a fund generates from dividends and interest, expressed as a percentage of its net income relative to its share price. It helps investors assess a fund’s income potential, though it differs from total return, which also includes capital gains. Understanding yield is necessary for evaluating investment performance and comparing income-generating funds.
Understanding Mutual Fund Yield
Mutual fund yield can be a leading metric for income investors to consider. This yield is typically calculated by including any income for the fund in a given year. Reviewing the fund’s income from dividends and interest, its board of directors determines the dividends the mutual fund pays to its investors.
All types of mutual funds pay dividend distributions, so investors seeking high-yield mutual fund investments have many options. In an equity mutual fund, the distribution is usually taken from dividends paid by the stocks in the portfolio. In a bond mutual fund, the dividend distribution often includes interest paid on bond investments in the portfolio.
Mutual fund yield can be given as a forward yield or a trailing 12-month yield. The forward mutual fund yield multiplies the most recent dividend distribution by the fund’s expected one-year dividend schedule. The trailing 12-month figure sums up the dividends paid over the past year and divides them by the value of one mutual fund share. Mutual funds typically pay monthly or quarterly distributions.
Comparing Mutual Fund Yield and Total Return
Investors in high-yield mutual funds should review how their funds calculate the yield. Platforms might give different figures for the yield since they use varying methods. The best all-around assessment of a fund’s performance is its total return. This differs from yield as it includes all dividend distributions, interest, and capital gains, accounting for any changes in the fund’s share price. In contrast, yield typically reflects only the income generated from dividends and interest. Therefore, while yield provides a snapshot of the income generated, total return gives a comprehensive view of both income and capital appreciation over a specific period.
Tip
Typically, the best measure of a fund’s income performance is total return. Yield provides only the income generated, but the total returns account for capital gains and changes in the fund’s share price.
Calculating Fund Yield: A Practical Example
Suppose a mutual fund is $20 per share and paid $0.04 in monthly dividends the past year. The trailing 12-month mutual fund yield is calculated by dividing the annual dividends paid by the share price:
- $0.48 ÷ $20 = 0.024, or 2.4%.
However, you might see instead the forward mutual fund yield. Suppose the mutual fund priced at $20 per share just increased its monthly dividend to $0.05. The forward mutual fund yield is calculated by multiplying $0.05 by 12 (for the number of months) and dividing that by the share price:
- $0.60 ÷ $20 = 0.03 or 3%.
Understanding the SEC Yield in Mutual Funds
An issue with distribution yields is that mutual funds might use different calculations to determine their figures. The SEC has a standard measure that most funds report on their platforms to provide investors with apple-to-apples comparisons.
The SEC yield allows investors to compare the income-generating potential of different funds. However, it’s not the same as the simple yield and total return.
It’s calculated using the net investment income (NII) per share for the last 30 days and annualizing it. This is the forward yield we already discussed. Like that simple yield, the SEC yield focuses on income, excluding capital gains or losses from its calculation. However, the SEC’s figure deducts the fund’s expenses (fund management fees, administrative costs, and other associated expenses), which most advisors argue provides investors with a better view of your potential earnings from a mutual fund. It doesn’t do you much good if fees eat up the extra dividend earnings a fund provides.
While the SEC yield can be found for most mutual funds, it’s especially valuable for bond funds. The reported interest income for the previous 30 days in the present yield environment is very important for assessing what you can expect from these funds.
Those who invest in bond mutual funds are typically focused on income. So, the SEC yield is also a priority for them, unlike those invested in equity funds, who might expect income from the capital appreciation of their fund’s stocks. One problem of the SEC yield—like other ways the yield is calculated—is that it’s based on lagging information. If the interest rate or market environment changes, your actual returns might not look like the SEC yield originally suggested.
SEC Yield Calculation: Step-by-Step Example
Suppose a mutual fund holds a portfolio of bonds that has generated $100,000 NII over the past 30 days. The fund has 1,000,000 shares outstanding, and its net asset value (NAV) per share is $10.
The SEC yield is calculated first by computing the daily NII per share:
- $100,000 ÷ 30 days ÷ 1,000,000 shares = $0.003333 per share per day
Next, you need to annualize the daily NII per share:
- $0.003333 × 365 days = $1.2167
Third, you subtract any fund expenses like the management fees and administrative costs. Let’s use an expense ratio of 0.5% (or $0.05 per share, given the $10 NAV per share) as our example:
- Net annualized investment income per share = $1.2167 – $0.05 = $1.1667 per share
Next, you divide the annualized NII per share by the current NAV to get the SEC yield:
- SEC yield = $1.1667 ÷ $10 = 0.11667 or 11.67%
This means that if the fund’s yield remains consistent and expenses stay the same, an investor could expect to receive about $11.67 in net income distributions annually for every $100 invested in the fund.
Examples of High-Yielding Mutual Funds
Investors have many income-paying mutual funds from which to choose. Below are two mutual funds with high yields.
Vanguard High Dividend Yield Index Fund (VHYAX)
The Vanguard High Dividend Yield Index Fund tracks the holdings and return of the FTSE High Dividend Yield Index. As of the beginning of the second quarter of 2024, its 30-day SEC dividend yield was 2.76%.
T. Rowe Price Emerging Markets Bond (PREMX)
The T. Rowe Price Emerging Markets Bond mutual fund invests in bonds from emerging markets. As of the second quarter of 2024, its 30-day SEC standardized yield was 5.89%.
Does a Higher Yield Always Mean a Better Mutual Fund?
No, a higher yield may indicate higher income, but it’s important to consider the fund’s overall performance, risk level, and fees before investing.
Do Mutual Fund Yields Change over Time?
Yes, mutual fund yields can fluctuate because of changes in interest rates, the fund’s holdings, and market conditions, thus changing the income distributions to investors.
Is the Yield on a Mutual Fund Guaranteed?
No, they aren’t. Mutual fund yields can vary widely based on the underlying assets’ performance and market conditions.
How Often Do Distributing Mutual Funds Pay Out Yields?
Mutual funds distribute returns monthly, quarterly, semiannually, or annually, depending on the fund’s policies and the type of income it generates.
The Bottom Line
Mutual fund yield shows the income a fund earns from dividends or interest and is essential for income-focused investors. Expressed as forward, 12-month, or SEC yield, the latter being standardized for comparison, it helps gauge income potential. Since methods vary, investors should check each fund’s prospectus. Yield reflects income, while total return gives a fuller view by including gains and price changes.