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IntermediateBrazilian REITs · Lesson I4.1 · Module I4

Dividend yield: the most misleading number

Module I4: Analysis indicators

11 slides~5 minquiz at the end

In this lesson

  • The 12-month yield math
  • Recurring vs one-off income
  • Why a falling price inflates yield
See the slides
Doors of the old Bovespa building in downtown São Paulo

Brazilian REITs · Lesson I4.1

The highest dividend yield is not always the best fund

Yield looks like a grade for the fund. It is just a division — and it misleads.

Wilfredor · Wikimedia Commons · CC BY-SA 4.0

The math

How the 12-month yield is calculated

9 × R$ 0.60+3 × R$ 1.50=R$ 9.90paid in 12 months
R$ 9.90paid in 12 months÷R$ 80share price=12.4%12-month yield

Twelve consecutive calendar months. Twelve payments spread over three years are not one year.

Look month by month

Three months won't happen again

  1. 0.60Jan
  2. 0.60Feb
  3. 1.50Mar
  4. 0.60Apr
  5. 0.60May
  6. 0.60Jun
  7. 1.50Jul
  8. 0.60Aug
  9. 0.60Sep
  10. 0.60Oct
  11. 1.50Nov
  12. 0.60Dec
R$ 0.60

The gold bars came from selling a property. The line is the recurring R$ 0.60.

Strip out the one-off

With the sale, 12.4%. Without it, 9.0%.

Yield with the one-off

12.4%

  • R$ 9.90 ÷ R$ 80
  • Counts cash that won't come back

Recurring yield

9.0%

  • 12 × R$ 0.60 = R$ 7.20
  • R$ 7.20 ÷ R$ 80

The trap

The price fell. The yield rose.

R$ 9.90÷R$ 80before=12.4%
R$ 9.90÷R$ 60after the scare=16.5%

The fund didn't pay a cent more. Only the price dropped.

Why it happens

A high yield can be a warning

  1. The market is worriedvacancy, defaults, a cut
  2. The price dropsmany investors sell
  3. The yield riseson the old payout

Often the price is already pricing in an income cut that hasn't happened yet.

Before you trust the yield

Three questions

  • Is it recurring?Remove property sales and one-off payouts.
  • Why did the price fall?A discount may be fear with good reason.
  • Does cash cover it?Income comes from what the fund generates (lesson I4.3).

On this site, yield is not part of a fund's quality score: the price falls, the yield rises, and “quality” would rise with it.

Remember this

Three takeaways

  1. Yield is a division12 consecutive months of income ÷ today's price.
  2. Strip out one-offsA property sale inflates yield and won't repeat.
  3. A falling price inflates yieldThe number rises without the fund paying more.

Quick quiz · 1 of 2

Same income, and the price fell from R$ 100 to R$ 70. The yield:

See answer

It rose. The same income divided by a lower price gives a higher yield — and the fund still pays the same.

Quick quiz · 2 of 2

Price R$ 50. Paid R$ 5.00 in the year, R$ 1.40 from a sale. Recurring yield?

See answer

R$ 5.00 − R$ 1.40 = R$ 3.60. R$ 3.60 ÷ R$ 50 = 7.2%. The 10% includes the sale, which won't come back.

Lesson complete

Next lesson

I4.2Intermediate · Lesson I4.2P/BV: cheap compared to what?P/BV 0.80 is only a discount if book value is realistic.Continue
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Educational content, written for learners. Not investment advice.