Monday, March 8, 2010

The Attractiveness of Dividend Yields

This isn't meant to be an attack on Surley Trader's post (which I believe unintentionally presents what I feel is misleading data), but rather to inform retail investors on the misleading data itself.

Surly Trader (hat tip Abnormal Returns) details:

Right now, the IShares Investment Grade Corporate Bond ETF (LQD) earns an indicated yield of 5.05% with an average maturity of over 12 years. On the equity side, the WisdomTree Dividend ex-Financials ETF (DTN) is currently earning an indicated yield of 5.04% without the same exposure to rising interest rates. Utilities alone (XLU) have an indicated current dividend yield of 4.93%.

The 5.04% indicated yield is not the yield of the fund, but rather the "current" fund distribution yield. According to WisdomTree, this yield is:
The annual yield a Fund investor would receive in distributions if the most recent Fund distribution stayed consistent going forward.
This measurement becomes irrelevant if dividends are widely varying. The most recent distribution for the WisdomTree Dividend ex-Financials ETF (DTN) was a 53 cent quarterly distribution in December (0.53 x 4 / $42 ETF price = 5.04%). Unfortunately, the dividend is not stable (the prior dividend was 0.368, which would have made the distribution yield just 3.5% back in November if the ETF were priced at its current level).

A more accurate yield is likely closer to 3.77%, which is what WisdomTree details as the SEC 30-day yield and according to
It is based on the most recent 30-day period covered by the fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses. This is also referred to as the "standardized yield."
While not perfect, by this measure the IShares Investment Grade Corporate Bond ETF yields 4.71% or ~100 bps higher than the WisdomTree Dividend ex-Financials ETF. This is not to say that the 3.77% yield is unattractive, especially when compared to the dividend yield of the components of the DJIA (only 6 corporations within the DJIA have a dividend yield above that level, which makes the 4.77% yield of investment grade corporate bonds even more attractive on a relative basis).

Back to the Surly Trader, who asks:
Why would you hold long-maturity fixed income bonds in a low interest rate environment on the precipice of an inflation wave when you can earn the same income from solid equity companies with upside potential?
Even if incomes were the same (they aren't), there is an important point missing... dividend yields do not always go up. In fact, as we learned in 2008-09, they can fall and fall quickly.

Source: Yahoo


  1. Hi,
    I certainly recognize the danger of using current yield but do you think the SEC yield or the iShares yield to maturity (or SPDR yield to worst)is better for comparing bond fund yields. Also, on average do stocks pay equal amounts per month or are the dividends bunched at quarter end/beginning? If so, do you think the SEC yield captures that. Thanks for answering if you can.

  2. bond funds are different beasts than equity funds as they have an accrued interest component that is accounted for as coupon payments rarely change (though there are exceptions with floating rate bonds, defaulted / reworked bonds, etc...). as a result the iShares YTM should be close to the SEC yield in most cases and likely fluctuates north and south of one another.

    not sure of the equity fund / etf side as there is really no accrued dividend accounted for in any 30 day window, just paid dividends.

  3. Thank you. I did not realize that they would accrue the interest for that calculation. I thought I used to see big differences sometimes (although the YTM seems based on NAV and maybe the SEC yield is on FMV). The only big difference I see now (in a quick scan)is on the TIPS etf. I think I will call and ask iShares now.