ETF Yields Aren’t a Clear-Cut Number

by Daniel Putnam | July 10, 2012 9:00 am

ETF Yields Aren’t a Clear-Cut Number

The universe of yield-focused ETFs is growing larger by the day, giving income-oriented investors an ever-expanding range of investment vehicles.

With so much attention given to yields right now — and fund providers tripping over themselves to offer products that satiate the demand[1] — it’s time to take a look at the way “yield” is measured.

The trouble is that most basic information providers calculate yield by simply taking the past 12 months of payouts and dividing that number by the current share price. This number often can provide a general idea of what type of yield you would have received in the past 12 months, which is fine with an individual stock that pays steady dividends, such as Altria (NYSE:MO[2]).

For ETFs, however, this number can be more deceptive because of portfolio adjustments, changing share count and shifting market conditions. Therefore, it’s wise to investigate any yield listed by a provider such as Yahoo! Finance.

Investors who are looking to buy an ETF usually are better off going to the issuing company’s website to get the official data rather than relying on a third-party source. But this leads to another problem: Many companies quote three different yields for their ETFs — which doesn’t exactly help clarify matters if you’re trying to figure out how much income you’re going to receive.

The three figures are:

  1. The yield based on the payout of the past 12 months (what you also see on Yahoo! and similar sites.
  2. The distribution yield, which annualizes the most recent distribution but assumes that distribution won’t change in the months ahead.
  3. The 30-day SEC yield, which takes the income from the last 30 days, annualizes it, and subtracts fund expenses.

An excellent example of how much these yields can vary is provided by the WisdomTree Global ex-Utilities Fund (NYSE:DBU[3]). On July 9, the company’s website showed a trailing 12-month yield of 4.83%, a distribution yield of 1.83% and a 30-day SEC net annualized yield of 3.75%. The problem here is that for stock funds, the lumpy nature of recent payouts distorts the annualized version of the most recent distribution. The trailing 12-month yield is therefore the most accurate number to use with stock funds.

However, keep in mind that you still will see a wide variation between that number and the yield you will actually receive. In this respect, consider it the best of several sub-par options.

If you’re looking at a bond fund, however, the SEC yield makes the most sense. The SEC yield figure approximates the yield an investor would receive in the subsequent year if each bond in the portfolio is held until maturity. This measure also assumes reinvestment of all income, and it accounts for expenses and the eventual drop in price for bonds trading at a premium to par. In contrast with equity funds, the trailing 12-month yield can be extremely inaccurate when applied to bond funds.

Stock Investors Need to Be Alert, Too

This confusion isn’t just limited to ETFs — individual stocks can show insanely high dividend numbers that in no way indicate what investors actually will receive.

Those who screen for dividend stocks might recognize the name Transportadora de Gas del Sur (NYSE:TGS[4]). Toward the end of 2011 and the beginning of this year, a number of information providers showed the stock having a yield in the 45%-50% range. Predictably, it appeared in a number of articles about high-yielding stocks.

There was just one problem, however — that yield was based on a one-time payout. Over time, the stock typically yielded 0%-2%, and today the yield is indeed back to zero. But not if you look at bigcharts.com, which now has TGS’ yield at a cool 84%, or Google Finance, which lists it at nearly 86%.

The lesson? Whether it’s an ETF or an individual stock, always check around before making any assumptions.

Dig Deeper

The short answer to the yield problem is that there is, in fact, no clear-cut answer, because no figure will tell you exactly what income you will receive in any future period. However, simply being aware of this problem — and not blindly accepting the yields quoted by third-party information providers — is half the battle.

A little bit of extra research, together with the use of the appropriate yield calculation, will go a long way toward helping you avoid surprises.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Endnotes:
  1. offer products that satiate the demand: http://investorplace.com/2012/07/new-etfs-love-dividends-but-hate-the-euro/
  2. MO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MO
  3. DBU: http://studio-5.financialcontent.com/investplace/quote?Symbol=DBU
  4. TGS: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGS

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