John Reese is chief executive officer of Validea.com and Validea Capital, the manager of an actively managed ETF. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service.
Dividend investors may be leaving some money on the table.
Picking stocks based on their dividend payouts is a time-tested strategy, boosting returns for investors compared with the broad market and providing steady income. Bank and utility stocks come to mind. The companies generate a steady-enough amount of cash that management feels comfortable paying it back to shareholders in a predictable way.
But company managements are increasingly using the share buyback as a way to return capital to shareholders, and strict dividend investing doesn't capture that activity.
Instead, investors should look at a broader measure, called shareholder yield, which takes into account both dividends and share buybacks. Picking stocks with higher shareholder yields may be a way to beat the market and a dividend-only strategy.
It all has to do with the choices company managements make when it comes to using capital. They can either invest it in existing operations, devote it to acquisitions, or give it back to shareholders.
The move to embrace the share buyback among U.S.-listed companies has been building for years, surpassing US$1-trillion in 2018, including an eye-popping US$100-billion program announced by Apple Inc.
Managements like the buyback for several reasons. It’s more tax efficient, and it’s more flexible. They can accelerate repurchases or back off as they see fit. Cutting a dividend, on the other hand, tends to be viewed unfavourably by the market. Buybacks also help boost measures such as earnings per share by reducing the amount of stock in circulation.
At the very least, shareholder yield can give an inkling of the return a shareholder could expect if the company doesn't grow and the stock stagnates. As long as all other things remain the same, the company can continue to pay dividends and buy back shares. Any growth beyond that is a boost to total return.
In a low-interest-rate environment, debt has become a popular way to finance giant buyback programs. But funding with internally generated cash is usually a more sustainable way to distribute capital, especially if interest rates start to rise. Debt cancellation is also factored into shareholder yield.
Cambria Investment Management’s Meb Faber wrote about this in his book Shareholder Yield: A Better Approach to Dividend Investing. In it, he looks at how different stocks have done over the years compared with dividend stocks specifically.
From 1982 to 2011, the S&P 500 gained an average 10.9 per cent annually. A group of high dividend stocks returned 13.4 per cent. But the group with high shareholder yields returned 15 per cent.
Cambria even has an exchange-traded fund (ETF) tracking the measure. The Cambria Shareholder Yield ETF (SYLD) is up 15.6 per cent this year.
James O’Shaughnessy, chairman of O’Shaughnessy Asset Management, also looks at shareholder yield in his book What Works on Wall Street and subsequent follow-up studies. He compared how investing in stocks with high shareholder yields fared against the market. He found that over 86 years, starting in 1927 and ending in 2013, stocks with the highest shareholder yields in his all-stock universe returned a real annual return of 9.8 per cent versus the average annual return of 7.5 per cent for all stocks.
To calculate shareholder yield on your own, take a look at the company’s cash flow statement. Take the total amount paid in dividends and add it to the amount spent to buy back stock. Then subtract the value of shares issued during the period to give you the net amount of stock bought back. That gives you the total amount spent on dividends and net buybacks.
Then, divide the total sum by the company's market capitalization.
For example, if a hypothetical company spent $5-billion on dividends and $3-billion on net stock buybacks, the total is $8-billion. If the market capitalization of the company is $100-billion, the shareholder yield is 8 per cent.
One reason investors may stay away from shareholder yield, Mr. O’Shaughnessy says, is that many of the highest yields are on small-cap stocks.
But there are some exceptions. Apple shares offer a shareholder yield of 6.1 per cent, and chipmaker Micron Technology Inc. has a 12-per-cent shareholder yield.
Using the stock screener on Validea, I searched for top scoring names according to my quantitative guru models and then ranked by shareholder yield. Here are six stocks (three in Canada and three in the United States) that may be interesting for investors who value shareholder yield.
Editor’s note: The table in a previous version of this article incorrectly showed the trailing dividend yield of MetLife Inc. at 7.8%. It is 3.6%.