Finding Yield In A Haze Of Smoke And Mirrors

February 26, 2010

Matt’s certainly right that the yield hunt is a tough one. But does he really understand what “yield” means?

Our new managing editor, Olivier Ludwig, is fond of saying: “Boy, I’m glad I’m not 65 right now,” and I’m inclined to agree with him. After all, the days when you could find some CD paying 10 percent and just forget about it are long, long gone. If you’re looking for actual income—as in, you genuinely want to be getting a check every quarter that you use to pay for your condo in
—your options are pretty limited.

But then again, how can you even know what the options look like? Let me pick one line item out of Matt’s last blog on the WisdomTree Pacific ex-Japan Equity Income Fund (NYSEArca: DNH). In the table (which is straight off Bloomberg), DNH reports an “Average Dividend Yield” of 7.02 percent. Sounds great right? That means if you stick a million bucks in DNH, you should be getting a $70,000 check every year, which in this environment, doesn’t sound too shabby.

Not so fast.

First, remember that when we’re dealing with dividends, there is no free lunch, and no guarantee. Dividends can vary wildly from quarter to quarter within the same industry and even the same company. First, these turbulent economic times have been rough on corporate earnings, and earnings are what translate into dividends. Sure, some companies stick to their dividends through thick and thin (Home Depot’s slow and steady dividend growth is the stuff of legend, even while earnings slid disastrously in 2009).

But even then, how do you know what that “7 percent” number really means?

Luckily, WisdomTree does a great job of explaining this, while showing you ALL the ways you could interpret yield. Here’s what they currently report on their Web site for DNH’s yield:


Fund Distribution Yield: 3.75%

SEC Standardized 30-Day Yield: 4.56%

Portfolio Gross Yield: 7.05%

Portfolio Net Yield: 5.92%


Those are some pretty big swings, but understanding them is key to having a no-surprises relationship with your income-generating investments. Let’s just walk through the list.

Fund Distribution Yield is simple, and perhaps the most useless measurement. It takes the very last distribution the ETF made to the ETF shareholders, and annualizes that, based on the current price. If the fund is trading at $100, and the last quarterly dividend was a dollar, it will assume that 1 percent gets kicked out every quarter and roll it up into a 12-month yield of 4 percent. Of course, there is no guarantee that future dividends will be anything like that very last one. In the case of DNH, the number can vary pretty wildly. The 24-cent dividend in 2009’s first quarter grew to almost twice that in the fourth quarter. Some companies also do one other little piece of math for you, and calculate the trailing 12-month fund distribution yield, which is just the last 4 quarterly dividends divided by price. That’s usually just reported as 12-month yield.

SEC Standardized 30-Day Yield gets a little closer to something we care about. It reports an annualized measurement of the actual earnings of the fund itself over the previous 30-day period, after expenses. It’s still a rearview mirror, but it’s one based at least marginally on the portfolio reality.

Gross and Net Portfolio Yield are just a little more interesting. The Gross Yield is calculated by looking at the trailing 12-month history of each and every holding in the fund, and simply comparing that with the holding’s current price. The weighted average is what’s reported, which is, in this case, that magic 7 percent number. The net number is what the fund would have actually collected of that yield, after foreign governments have collected their taxes. For a fund with just
investments, the numbers are identical.

So what’s an investor to do? Historically, the best bet is to look at the SEC 30-Day Yield and the Portfolio Net Yield. Your actual forward experience is likely to be somewhere in the range between the two. And if you’re confused by all this uncertainty, well, that’s why there’s a bond market, or, as some folks call it, “FIXED Income.” Fixed, that is, if you buy one bond.

Bond funds? That’s a story for a different day.



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