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iShares TIPS Bond Message Board

  • excinvest excinvest Jun 16, 2011 5:44 AM Flag

    Math on TIP

    I'm trying to get the math on this. And yes, I'm new to the investing game. I received these numbers from scottrade. Please bear with me. The 11.38% Dividend Yield was calculated by the Jun 7 price of 110.58 = 12.584004. This is divided by 12 since the dividend is paid monthly = 1.05. Ok.

    Now, I'm assuming that the 3.15% yield is completely separate, and that this is the only thing that ties this ETF to inflation. If I bought 100 shares at $100 each, my principle is 100k. At the end of the year, I should get $103,150. Since this ETF pays monthly, I should expect 3150/12 = 262.5 per month from this yield alone. From the dividend yield, I should expect another 1.05 x 100 shares = $105 a month for a total of $367.5 a month.

    Is this correct? Or:

    first month's payment = [[.0315/365] x 30days x principle] + 105
    2nd month's payment = [[latter calculation minus 105] x [.0315/365] x 30days] + 105.
    3rd month's = etc etc

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    • Here's how you get the 3.15% yield listed on Yahoo.

      First you take the total distributions that this fund has made over the year ending in May 2011. You can find this information on the iShares site.

      The fund has paid a total of $3.49 per share from June 2010 to May 2011 (12 months).

      You then divide this by the price of the fund. That's about $3.49 / $110. That gives you 3.2%.

      If real interest rates (inflation adjusted rates) had remained a constant over the period, then 3.2% is what investors would have made. However, real interest rates fell. TIP's price rises as rates fall. The rise in the price of TIP is not counted as part of the yield though.

      The key going forward is what inflation does and what interest rates do. Inflation boosts the distributions. Falling real interest rates boosts TIP's price.

      TIP's price will only rise if investors keep pouring into TIPS. With 5-year real TIPS yields now firmly in negative territory (a nearly guaranteed loss in purchasing power) that could be difficult. Worse, if we experience another deflationary event then TIP investors could both see distributions fall dramatically and TIP's price to fall as well. We've already seen this happen once in recent years.

      $100 oil might have been the peak this go around. I would not rule it out. If it is, then the easy money has already been picked from the TIP tree. On the other hand, if we return to the stagflationary 1970s and stay there then TIP investors even at these prices should do okay.

      Just opinions.

    • Here's all the TIP math you need. There's no need to look in the rear view mirror to see how TIP has done historically.

      Go to iShares.com and look at TIP's "Average Real Yield to Maturity". It shows 0.26%.

      It tells you how much interest you will earn above the rate of inflation.

      Now subtract off "Total Annual Fund Operating Expenses". It shows 0.20%.

      All things being equal, you should net 0.06% over inflation.

      If the CPI-U rises 3% over the next year, then you will earn 3.06%. If the CPI-U rises 0% over the next year, then you will earn 0.06% (before taxes).

      In other words, if you can tell me what inflation will do over the next year then I can tell you about how much this fund will pay out over the next year.

      I won't be able to tell you the price of TIP though. It depends on how much investors value TIPS. If investors rush out of TIPS then TIP's price will fall. If investors rush in to TIPS then TIP's price will rise.

      TIP's payouts are based on the consumer price index. If it is running hot then so too are TIP's payouts.

      TIP's price is based on real interest rates (inflation adjusted interest rates). If they are falling then TIP's price goes up. If they are rising then TIP's price goes down.

      • 1 Reply to markm0722
      • Thanks guys. And mark, I was hoping you'd post! So was my previous math right or wrong? I'm curious. But yeah, the average real yield is what really matters. I understand it better thanks to you.

        In another post, you explained that "TIP has paid a total of $2.93 in distributions over the last 6 months. That's about 2.7%." How did you get these numbers?

        Also, do you have most of your money in TIP? (ie, money you'll need in the relatively nearby future)

    • hayport@att.net hayport Jun 16, 2011 3:28 PM Flag

      The dividend varies each month.I have info for the past 5 months.
      June - $1.04929
      May - $ .59385
      Apr. - $ .58210
      Mar. - $ .27438
      Feb. - $ .16410

 
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