Interest rates are still hovering at their lowest levels in decades, and many investors are looking for bond funds that generate a suitable level of income. If you’re one of them-and are comparing income funds-you may want to look at one or both of two commonly quoted figures: the SEC yield and the dividend rate (also referred to as distribution yield).
A dividend rate shows what a bond fund pays you in distributions. The figure is typically calculated by taking a bond fund’s income in the most recent month, multiplying by 12, and dividing by a recent fund share price.
That’s great, but the number assumes that a fund’s distributions remain constant for a year, which may not be the case. This is why investors also look at the SEC yield. This standardized yield-devised by its namesake, the Securities and Exchange Commission-seeks to more accurately reflect a bond fund’s income-producing potential over time by looking at the “yield to worst” of all the individual holdings in a mutual fund’s portfolio.
Which is better?
Both the dividend rate and the SEC yield provide useful information to investors, but which of the two is a better indicator of a fund’s actual yield is less clear. Many people prefer SEC yield because it takes into account the eventual decline of a bond now trading at higher than face value. Others prefer dividend rate because SEC yield includes some worst-case assumptions.
In general, it’s a good idea to ask your advisor. He or she can help you read the fine print in order to ensure that you understand what kind of yield you’re looking at and accurately compare and contrast it (because dividend rate is not directly comparable to SEC yield).
It’s also important to consider other factors when investing in a bond fund, and your advisor can discuss these with you in detail.