Distribution Yield

Distribution Yield: Definition, Calculation, and What It Tells Investors

What is distribution yield?

Distribution yield measures the cash flow an income-paying security (for example, an ETF, mutual fund, or REIT) delivers to investors. It annualizes the most recent distribution and expresses it as a percentage of the security’s net asset value (NAV) at the time of payment. It’s a snapshot of income, not a guaranteed long‑term return.

How to calculate distribution yield

Basic formula:
Distribution yield = (Most recent distribution × 12) ÷ NAV

Step-by-step:
* Take the most recent cash distribution (interest, dividend, or capital‑gains payout) per share.
* Multiply that monthly amount by 12 to annualize it.
* Divide the annualized distribution by the fund’s current NAV and convert to a percentage.

Example:
A fund priced at $20 per share pays $0.08 in interest this month.
Annualized distribution = $0.08 × 12 = $0.96
Distribution yield = $0.96 ÷ $20 = 0.048 = 4.8%

Limitations and common distortions

Distribution yield can be misleading because it relies on the most recent payment:
* Special or non‑recurring dividends (one‑time payouts) can inflate the yield.
* Capital‑gains distributions (often paid annually) can either inflate or deflate the yield depending on their timing and size.
* Using a single payment to annualize assumes payments will repeat at the same level, which may not hold true.

To reduce distortion, many investors use the trailing‑12‑month (12‑month) yield: total all distributions paid over the past 12 months and divide by the NAV. That method captures actual recent payments rather than extrapolating from one period.

Capital gains and their effect

Mutual funds and ETFs often distribute realized capital gains (long‑ and short‑term) once a year. Including a large capital‑gains distribution in the most recent payment can:
* Overstate the distribution yield if that payout is larger than recurring income.
* Understate the yield if that capital‑gains payout is smaller than the recurring payments it replaces.

Always check the composition of distributions (interest, dividends, capital gains) to understand what drives the yield.

SEC yield vs distribution yield

Key differences:
* SEC (30‑day) yield: standardized annualized yield based on the fund’s most recent 30 days of income and expenses. Designed to approximate the yield an investor would receive after expenses if the fund’s holdings were held to maturity.
* Distribution yield: annualizes the most recent distribution and divides by NAV. Calculation methods vary between funds.

Pros and cons:
* SEC yield is standardized and comparable across funds, but it reflects a recent short‑term period and assumptions that may not match investor behavior.
* Distribution yield can reflect actual recent payouts (if using a 12‑month total) but is easier to distort by timing or one‑off events.

Use both measures: SEC yield for standardized comparison and distribution/12‑month yield to see actual recent cash returned to investors.

How investors should use distribution yield

• Treat it as an income snapshot, not a guarantee of future payouts.
• Prefer a trailing‑12‑month yield over a single‑distribution annualization to capture actual recent payments.
• Review distribution composition (interest vs. dividends vs. capital gains).
• Compare distribution yield with SEC yield and other metrics to get a fuller picture.
• Consider taxes and whether income will be reinvested or taken as cash.

Key takeaways

• Distribution yield shows annualized cash income relative to NAV using the most recent distribution.
• It can be skewed by special dividends and capital‑gains distributions; a trailing‑12‑month approach is more reliable.
• Compare distribution yield with SEC yield and examine distribution composition to assess the sustainability and nature of income.