Unlike those of common stocks, dividend yields of mutual funds are difficult to calculate, according to a recent article in Barron’s.

For common stock, the calculation requires dividing the annual dividend per share by the stock price. But the process is more complex for mutual funds, the article reports, “given how many pieces to the puzzle and different yield readings there are.” Therefore, investors rely on yields disclosed by advisors or by the fund themselves—but the article argues that it’s important to understand how these yields are determined.

The article outlines three measures of mutual fund yields, which it says can vary significantly:

• The SEC yield (also called the 30-day yield)—perhaps the most commonly cited metric, this is based on dividends and interest earned by the fund’s holdings during the most recent 30-day period (less expenses), and divides it by the value of the outstanding fund shares. That number is then annualized. The advantages of this metric are; (1) it reflects the actual yields of the underlying holdings and a “snapshot” of what kind of income is coming in, and (2) it offers a more current read than the other measures. But it only offers an estimate, the article points out, since “it’s impossible to predict what will happen to a fund’s holdings over the next year.”
• The 12-month yield—which includes capital-gains distribution and can therefore be quite a bit higher than the SEC yield. According to the article, many investors argue that capital gains don’t belong in a calculation assessing a fund’s yield–that the metric is inherently more volatile and isn’t forward-looking. Others argue, however, that the 12-month yield is more accurate because it represents what the fund has actually paid out over the course of a year.
• The trailing 12-month yield—which Morningstar describes as “the percentage of income your portfolio returned over the past 12 months.” The article describes this measure as a summary, rather than a predictor, of a fund’s performance, adding, “But it does offer some insights into the dividend tendencies of a fund’s holdings. It uses the weighted average of the yields of the stocks and, if applicable, funds held in a portfolio.”

The article concludes: “Whichever fund yield investors consider; they need to understand the basic framework at a minimum. A good starting point, then, is to understand the various kinds of yields that can apply to equity-income funds—and the different pillars that deliver returns, notably capital appreciation and reinvested dividends.”