Net vs. Gross Dividend

A stock or mutual fund that pays dividends will return some of its earnings to investors. The amount of the dividend is not as important as the yield, meaning the percentage of return the dividend represents. A 10 cent annual dividend on a $1 stock, for example, means the stock yields 10 percent. When calculating dividends, it's always useful to consider "gross" versus "net yield."

Gross yield is the dividend return on a stock before any expenses, taxes or deductions are taken into account. Calculating gross yield is a simple matter of dividing the dividend amount by the stock price when the investor purchased the security. "Current" yield would be the same calculation, using the stock price when the dividend is paid. The resulting percentage figure does not include any capital gain or loss, whether realized or unrealized. Many stocks pay quarterly dividends, which you must add together over a full year to calculate annual gross yield.

Mutual funds pay distributions, although in most cases, they do so only once a year toward the end of the year. A fund is a portfolio of securities: stocks, bonds, certificates of deposit, money market contracts, futures contracts or some combination of these and other investment vehicles. A fund distribution represents the income received by the fund from its various investments, as well as the net capital gains from buying and selling securities. The gross yield in funds and stocks remains the same: the amount of the distribution or dividend, divided by the market price on the day of the payout. Fund and stock prices typically adjust downward to reflect the payout when it occurs.

If investment life were simple, there would be no need to calculate net dividend yield. But the net yield is the unvarnished truth about how much you're actually earning from that investment. When a stock pays a dividend, the Internal Revenue Service steps in and levies a tax on the money. The tax hit must be subtracted from the dividend amount before calculating net yield. Tax law further muddies the issue by classifying dividends as "ordinary" or "qualified." You pay tax on ordinary dividends at the same rate as the tax on other income you earn. Qualified dividends enjoy the lower capital-gains tax rate.

If you're holding a mutual fund, the net yield is the distribution amount, less expenses charged by the fund, as well as any taxes on that distribution. All mutual funds charge fees and expenses, usually in the 1 to 2 percent range. The fund will reveal expenses it has charged in its annual financial statements. To calculate net yield, subtract the expenses from the distribution amount, then divide the result by the fund closing price on the day of the payout. Even if you reinvest the distribution in more shares of the fund, they're still taxed in the year you "received" them.