How do I find the dividend yield of the S&P/TSX composite index or any index for that matter? How would I calculate the yield if I bought an index fund?
The yield of the S&P/TSX index is not widely disseminated. That’s because it’s proprietary data for which the exchange charges a fee, said Tony North, director of Canadian index operations at S&P Dow Jones Indices.
However, I can tell you – for free – that the S&P/TSX composite’s yield is currently about 3.1 per cent. This number, which I got from my Bloomberg terminal, is based on dividends paid by index constituents over the past 12 months.
Index yields bounce around just like the yields of stocks. Over the past three years the S&P/TSX’s yield has ranged from a high of 3.41 per cent to a low of 2.35 per cent. The average yield over that period was 2.8 per cent. So, based on yield alone, the index looks reasonably valued.
I also looked up the yields of U.S. indexes. The Dow Jones industrial average yields about 2.37 per cent, and the S&P 500 about 2.04 per cent.
The yields of exchange-traded funds (ETFs) are easier to find. But interpreting what the numbers mean is not always straightforward.
Consider the iShares S&P/TSX Capped Composite Index Fund (XIC), which is designed to replicate Canada’s benchmark index, net of expenses.
If you visit the iShares Canada website and enter XIC in the search box, the “overview” page lists the ETF’s “distribution yield” as 3.31 per cent (as of Friday). However, this number is misleading because it assumes the ETF’s most recent quarterly distribution will stay the same for the rest of the year, which isn’t necessarily the case. In fact, XIC’s distribution varies from quarter to quarter, so a particularly large or small payment in the most recent period can distort the annualized yield.
A better measure of XIC’s yield, found directly below the distribution yield on the iShares website, is the “12-month trailing yield.” This number represents the sum of XIC’s distributions over the previous 12 months divided by the current unit price. Based on this measure, XIC yields a more modest 2.73 per cent.
Here’s a nifty party trick: If you don’t know the yield of an index, you can get a ballpark estimate by taking the yield of an ETF that tracks the index and making a minor adjustment to reflect the ETF’s expenses.
Continuing with our example, we know that XIC’s trailing yield is 2.73 per cent. But we also know that this is net of the fund’s annual costs which, based on the management expense ratio (MER) listed on the website, are 0.27 per cent. If we add back the MER, we get a yield of 3 per cent, which is close to the 3.1-per-cent yield of the S&P/TSX composite reported by Bloomberg.
This method works with other index ETFs as well. For example, many financial websites provide the yield for the SPDR Dow Jones industrial average ETF, which is currently about 2.22 per cent. Add the MER of 0.17 per cent and you get 2.39 per cent – again, close to the Dow’s actual yield of 2.37 per cent.
Be careful when looking up ETF yields, because not all providers calculate them the same way. BMO ETFs, for instance, use the term “portfolio yield.” This is the yield of the individual securities in the fund before expenses, so it overstates the investor’s actual yield. What’s more, it is a forward-looking measure based on the most recent dividend for each of the fund’s holdings (not to be confused with an annualized yield based on the most recent distribution of the fund itself: see XIC’s “distribution yield” above).
There is nothing wrong with using a forward-looking yield – also known as an “indicated yield.” After all, stock yields are reported this way, the assumption being that the most recent dividend will continue for the next four quarters. But it’s important to understand that, with ETFs, a forward-looking yield before expenses is going to look a lot better than a trailing yield after expenses, even for two identical ETFs.
Bottom line: When looking at yields of various ETFs, make sure you’re comparing apples with apples. The only way to do that is to read the fine print.