Monthly Distribution Rate
While the SEC yield's calculation is standardized, the formula for distribution rate – also called "distribution yield" – can vary. Most fund groups quote distribution rate as a monthly 30-day figure. Like SEC yield, a fund's 30-day distribution rate uses the previous month's income to project an annualized figure.
Formula for calculating the Monthly Distribution Rate
Even though SEC yield and 30-day distribution rate cover the same time period, it's not unusual for those two numbers to differ. One reason is the way they treat certain classes of securities. Preferred stock, bonds purchased at a discount or a premium, foreign bonds, and mortgage-backed securities are all handled differently by each calculation.
Annual Distribution Rate
Because of the potential discrepancies, many popular publications – Money Magazine and Morningstar, Inc.'s fund reviews, for example – prefer to use an annual distribution rate that represents the actual income paid out over the past twelve months.
Formula for calculating the Annual Distribution Rate
Since they cover different time frames, the two methods usually produce different yields. For instance, in a falling interest-rate environment, a fund's 12-month distribution rate is likely to be higher than its 30-day rate, since the annual figure includes income earned during the prior months when rates were higher.
Does this mean that monthly distributions should go up (given rising interest rates), but maybe not for some time? Thanks,