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Which is more important?

Which is more important % Dividend Yield TTM or % SEC Dividend Yield in measuring a fund's performance, present or future?

Comments

  • The 30 day SEC yield is the best approximation of what a fund would return if it held its bonds to maturity/call. If one thinks of a portfolio consisting of a single bond, the SEC yield would be the YTW.

    For example, a 5 year bond selling at $104, with a 5% coupon would yield 4.1% to maturity. That's the same as buying a 5 year bond selling at par with a 4.1% coupon. From the point of view of your total return, no difference. These are even treated the same for tax purposes - the higher coupon is treated as return of principal, so that at the end of five years, cost basis of the first bond is $100.

    If what you care about is higher interest payments (5% vs. 4.1%) and the loss of 4% in principal (over the life of the bond) is not of concern, then look at the trailing or current yield. If what you care about is total return, including loss (or gain) in principal because bonds don't always trade at par, then look at SEC yield.

    There's another SEC yield figure, which is the 7 day yield. It is used for MMFs, and is effectively a current yield calculation. Which makes sense because MMF portfolios mature extremely quickly - current yield and YTW are very similar. With MMFs, looking at TTM is silly. Consider:

    VMFXX TTM (1 year) return was 0.17%, while its SEC (current) yield is 1.45%
    Vanguard MMFs

    Here's what Calamos says about 30 day SEC yield:
    30-day SEC yield was introduced in 1988 by the Securities and Exchange Commission to standardize the inputs mutual funds employ to calculate the statistic, allowing for a fairer comparison. The calculation uses the current yields to worst of all fixed income portfolio holdings to estimate how much interest the fund’s assets would have earned over the past 30-day period. After deducting the fund’s expenses and fees, the income earned is annualized and divided by the net asset value on the day of calculation. While standardized, the 30-day SEC yield is limited in that it is based on a static portfolio as of month-end. However, because 30-day SEC yield is based on the yield to worst methodology ..., it is more forward looking and can provide a more accurate indication of the income an investor might expect to receive.
    https://www.calamos.com/globalassets/media/documents/sales-ideas/yldcom-033031-0917o-c_final.pdf
  • TTM is what someone holding the fund already got. It is past history. You don't get it now or in the future.

    Distribution yield (monthly or quarterly payout annualized) is more indicative of what a new buyer may get now or in the near future.

    30-day SEC yield is a standardized YTM and is a reflection of the potential TR that a long-term buyer may expect.

    All 3 have their places and roles.
  • Thank you for the explanations.
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