What it means
Investors buying income-producing funds, investment trusts, real estate vehicles or exchange-traded funds want a simple way to compare what each one pays. Distribution yield does that by dividing the distributions of the last twelve months by the current market price.
It is deliberately backward-looking and refreshingly easy to calculate. The measure differs from dividend yield in an important way.
A dividend yield normally reflects profits paid out by a company, whereas a distribution can include interest, rental income, realised gains and return of the investor's own capital. Two funds can advertise the same 6% distribution yield while one pays it entirely from income and the other partly from selling assets.
That distinction is where most of the analytical value sits. A distribution funded by return of capital gradually shrinks the asset base, so the same percentage becomes harder to sustain each year, and the investor is partly receiving their own money back.
Fund reports break the distribution down by source, and checking that breakdown matters more than comparing headline percentages. Presentation conventions also vary and can mislead.
Some providers quote the trailing twelve months of actual payments, others annualise the most recent payment, and others quote a forward estimate based on what the manager expects. Annualising a single unusually large quarterly payment can make a fund look far more generous than it is.
Finally, remember that the price in the denominator moves. A fund whose price falls 25% shows a higher distribution yield with no change at all in the cash it pays, and a rising yield is often a warning that the market expects the payment to be cut.
Yield alone never tells you whether a holding is cheap.
In practice
Real-world examples.
Example
A retired investor compares two bond funds quoting 5.2% and 5.9% distribution yields. Reading the factsheets shows the higher-yielding fund holds longer-dated and lower-rated bonds, so the extra 0.7 percentage points is payment for extra risk rather than better management.
Example
A property investment trust's share price falls 30% after a tenant collapse, pushing its distribution yield from 5% to just over 7%. The board cuts the distribution the following quarter, confirming that the elevated yield reflected an expected cut rather than a bargain.
Example
A fund platform lists an equity income fund at 4.1% based on trailing twelve month payments, while the fund's own site quotes 4.6% on a forward estimate. The difference comes entirely from a special payment the manager expects to make later in the year.
Formula
Calculation
Distribution yield = (Total distributions per unit over the trailing 12 months / Current price per unit) x 100
An infrastructure income fund pays $0.09 per unit each month. Over the past twelve months that gives total distributions of $0.09 x 12 = $1.08 per unit, and the units currently trade at $18.00.
Distribution yield = ($1.08 / $18.00) x 100 = 6.0%
Now consider the alternative conventions. If the most recent monthly payment had risen to $0.10 and the provider annualised it, the quoted yield would be ($0.10 x 12) / $18.00 = $1.20 / $18.00 = 6.67%, which looks materially better from one month's payment. And if the fund's own report shows that $0.20 of the $1.08 was return of capital rather than income, the income-only yield is ($1.08 - $0.20) / $18.00 = $0.88 / $18.00 = 4.89%. Three defensible numbers, 6.0%, 6.67% and 4.89%, all describe the same fund.Case study
Seen in the real world.
Harborlight Income Trust is a fictional listed trust created for this illustrative example. It paid $0.30 per share each quarter, $1.20 a year, and with the shares at $20.00 it advertised a 6.0% distribution yield, which attracted a steady flow of income-focused buyers.
A closer look at the annual report showed that underlying net income covered only $0.94 of the $1.20, with the remaining $0.26 per share funded by selling holdings. Across 40,000,000 shares that amounted to roughly $10,400,000 a year of capital being paid out as though it were income, and the trust's net asset value per share had drifted down from $23.10 to $20.60 over three years.
When the board finally rebased the distribution to $0.95 a year, the share price fell to $14.50, so the yield actually rose to about 6.6% while investors lost value. The illustrative moral is that a distribution yield describes what has been paid, not what can be afforded, and the coverage figure is the number that answers the second question.
Watch out
Common mistakes.
- Choosing between funds on distribution yield alone, without checking whether the payments are covered by income or funded by returning capital.
- Comparing a trailing twelve month yield from one provider with an annualised or forward yield from another, which is not a like-for-like comparison.
- Reading a rising yield as improving value, when it usually means the price has fallen because the market expects the distribution to be cut.
Questions
People also ask.
Is distribution yield the same as total return?
No, total return combines distributions with any change in the value of the holding, so a fund can pay 6% and still lose money overall.
Does a distribution yield account for charges?
Distributions are normally paid after the fund's ongoing charges, so the yield reflects what an investor actually receives, but platform fees and tax sit outside it.
What does distribution coverage mean?
It is the ratio of net income earned to distributions paid; a figure below 1.0 shows the fund is paying out more than it is earning and dipping into capital.
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