Let’s start with the basics:

Do bond funds have to distribute all the interest income that they collect from the bonds they hold?

Yes, bond mutual funds and Bond ETFs must distribute 100% of the income and realized short and long term capital gains to shareholders each year.

How often do bond funds distribute income to shareholders?

They are required to do so a minimum of once per year. However, most bond funds (4 out of the 5 largest) distribute interest income and short-term capital gains monthly. The exception to this rule is the Vanguard Inflation Protected Securities (VIPSX), which pays out quarterly. Typically, long-term capital gains are distributed once per year, at the end of the year.

The exact timing of when the money will come into your account is determined by the mutual fund or etf provider. However, as long as you are the owner of the fund at the end of the day on the “record-date”, you will receive the distribution on the “payable date”. Another term you will hear relating to this is “ex-dividend date”.  Here are the definitions of each of these terms:

• Record-Date: The date the fund records who is an investor and is therefore due a payment.  In order to receive an income and/or capital gains distribution you must be an owner of the fund on the Record-Date.
• Payable-Date: The date that distributions are made and the checks are sent.
• Ex-Dividend Date: The date in which the distribution is deducted from the share price of the fund.

Sometimes the dates are listed on the mutual fund company’s website, and sometimes you will need to contact the mutual fund provider in order to find out these dates.

A Bond Fund’s Advertised Yield

Most bond fund advertising focuses on the fund’s yield.  The standardized yield number that all bond funds are required to report is the 30 Day SEC Yield.  This measure is an estimate of the annual yield of a bond fund assuming the bonds in the fund’s portfolio over the past 30 days were held to maturity, and that all interest income is reinvested.  (You can learn more about the SEC Yield as well as other measures of bond fund yield here ).

Many investors will quite logically assume that the advertised yield of the fund is a good measure of the amount of income they can expect to receive from the fund in the future.  Unfortunately this is not always the case.

Why is the Advertised Yield Not a Good Measure of Future Income Potential?

Because the Yield of a bond fund is constantly changing, for the following reasons:

1. As interest rates rise and fall so does the value of the bonds the bond fund is holding in its portfolio.  As the bonds in the portfolio change in value so will the bond fund’s yield.  If the fund continues to hold the same bonds after interest rates change, then the fund’s advertised yield will change, but the dollar amount of the income payments will not.
2. The majority of bond funds have a stated maturity range.  For example, an intermediate bond fund will always hold bonds with an average time to maturity of between 4 and 10 years.  In order to adhere to the fund’s stated objective, the fund will periodically sell bonds with shorter maturities and replace them with new bonds that have maturities which match the fund’s objective.  The old bonds being sold and the new bonds being acquired will have different interest rates. When the fund sells bonds with one interest rate, and replaces them with bonds earning a different interest rate, both the fund’s yield and the dollar amount of your interest payments will change.

What should you focus on instead of yield?

Bond Mutual Fund and ETF Income Distribution Comparison