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Recently I heard from a reader who admitted with some embarrassment that she did not understand the difference between "yield" and "return." I suspect she has plenty of company.
She was trying to compare a money market fund with a short-term corporate bond fund. The money market fund had a current yield of 0.76 percent and a year-to-date return (through May) of 0.31 percent. The bond fund had a current yield of 3.07 percent and a year-to-date return of 0.13 percent. She asked: Which factor is more important? Which would provide more income when needed? She had a hunch the bond fund was better, but she really didn't know.
In fact, the investor who owned the money market fund would be ahead so far this year, although not necessarily for the long run.
To compare numbers like these, you first have to understand what they represent.
Yield refers to the interest and dividend income earned on a fund. It is based on the income over a certain period (such as seven days or 30 days) and on the assumption that income will continue to be earned at the same rate. It is expressed as an annualized number, representing a full year's income. Return, sometimes referred to as "total return," combines the interest and dividends paid and the change in share price to tell you what an investor's money actually earned during a specific period in the past.
The bond fund has a higher yield because it is paying more in dividends than the money market fund. But because bond prices have fallen this year, the bond fund's share price went down. In fact, it went down nearly as much as the dividends it earned, so the return was barely positive. An investor with a $10,000 investment in each fund would have earned $31 on the money market fund and $13 on the bond fund through the first five months of this year.
To make sense of these numbers, it also helps to pay close attention to the time period involved. The annualized yield on the money market fund of 0.76 percent (a 12-month figure) is about the same as an annualized year-to-date return of 0.31 percent (a five-month figure).
Which is most important? Money-market funds have a fixed price of $1 per share, so what matters is the current yield. With bond funds, total return is more important.
Q. I receive a small pension and Social Security, yet when I go to senior citizen tax assistance, I always end up owing money. I have saved money and I pay taxes on the interest I receive. Two of my friends say I'm foolish to save. They both receive government assistance but I don't know why. The people who get government assistance are better off than anyone else. Is this fair? What does one gain by saving?
I seriously doubt that people who receive government assistance are better off than anyone else. Most likely your friends receive Supplemental Security Income, otherwise known as SSI, a program for the low-income elderly and disabled. A single elderly person who qualifies for the program might be able to receive a combined income of $584 a month from Social Security and SSI and also would be eligible for Medicaid in the state of Florida. That wouldn't exactly support a luxury lifestyle. To be eligible for SSI, a person cannot have more than $2,000 in assets, although some things are not counted, such as equity in a primary residence. The rules are somewhat complex, so readers who think they might be eligible should call Social Security directly.
People who are fortunate enough to have savings generally have more options in life.
Q. I'm 65 and retired. Looking ahead, it appears that minimum distributions from my traditional IRA will be much more than I need. To reduce future withdrawals and taxes, I plan to start withdrawing as much as I can each year while staying in the 15 percent marginal income tax bracket. I plan to convert most of these withdrawals into a Roth IRA. Does this plan make sense to you?
Yes. However, keep in mind that once you are required to begin taking withdrawals, your required distributions cannot be rolled into a Roth.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.