Mutual Fund Yield

Categories: Mutual Funds

The fund's Net Asset Value, or NAV, was $20. That is, it cost you $20 to buy one share of Zippy Bob's Income Vomiting Mutual Fund.

Mutual funds are required to distribute cash to shareholders on a regular schedule, with various triggers. One trigger revolves around realized gains. A fund bought a stock for $15 a share 2 years ago, and felt that, at $40, it had gotten pricey...so they sold it and realized a long-term gain taxable gain of $25.

They are required to distribute that cash back out to shareholders. It'll get taxed on a long-term gain basis if the holder holds that mutual fund in a taxable account (i.e. not an IRA or 401k or other pension fund which isn't taxed until it's brought over into their personal account). So there is cash that comes from distributions that is more or less in the control of the mutual fund, like choosing to realize a gain. (A not-in-control sitch would come from a fund owning shares in a company that was bought for all cash, in which case the fund will get the cash, and they have no option other than to realize that gain.)

But these are events, not regular things that happen. So they get counted when analysts review trailing actual cash yields of a fund...but a more apt number is the fund's targeted yield.

Like...a given fund will target, say, 4% yield, and it'll get there with some combination of stocks and bonds. If it has a bunch of 2% growthy stocks in there, then it likely has to find bonds yielding 6% to offset the spread. This structure presents a challenge, in that funds try to optimize a bunch of things to fit their charter or the promise they've made to investors. A fund may have 4% yield as the absolute top priority, ignoring all else.

Other funds may try generally to target a yield of 4%, but want to see growth in the NAV of the fund as well. Regardless, the fund's yield usually derives from the yields of the stocks and bonds it holds, on which it can hopefully depend. (Hello, GE, KHC, and Teva. Thanks for cutting your dividends when we were counting on you.)

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