When you look up the specifics of a bond mutual fund, you will find several different reported yields. Each type of yield is useful, but the 30-day Securities and Exchange Commission yield rule requires every fund to calculate this particular yield number the same way. Use the 30-day yield to compare the potential return of different bond funds.
The 30-day yield reported by a mutual fund uses a yield calculation formula mandated by the Securities and Exchange Commission. The purpose of the 30-day yield requirement is to provide a uniform result that investors can use to compare the expected yields of different funds. This yield amount is the income the fund would pay over the next year if no changes were made to the fund's portfolio holdings.
The 30-day yield is calculated by taking the fund's interest and/or dividend earnings for the most recent month and dividing by the average number of shares outstanding for the month times the highest share offer price on the last day of the month. The resulting monthly interest rate is compounded semi-annually for a 12-month yield. In effect, the calculation uses the most recent month's tally of net interest earnings and projects those earnings out for the next 12 months.
Mutual funds also usually report a distribution yield. The yield may be based on either the most recent fund dividend amount -- usually monthly for bond funds -- or the total distributions per share for the last year. It either case, the dividends are annualized and divided into the end-of-month share price. The distribution yield is a backward-looking calculation based on historic dividends paid by the fund.
Evaluating a Fund
The 30-day SEC yield and the distribution yield of a mutual fund may show significantly different numbers. The 30-day yield is the conservative estimate of what an investor should earn over the next 12 months. Neither yield takes into account the effect of changing share prices on the total return. Besides looking at the reported yield numbers, an investor should look up the actual dividend history to see if the distribution rate has been increasing, decreasing or staying consistent.
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