What Dow Dividend Investors Must Know About Buybacks

Some argue that the Dow’s dividend yield is too low, but incorporating stock buybacks paints a much different picture of the average.

Jan 19, 2014 at 9:02AM

Dividend investors generally regard the Dow Jones Industrials (DJINDICES:^DJI) as a fertile ground for smart dividend-stock ideas. On the whole, though, the Dow's overall dividend yield is relatively low, at just 2.1%.

Yet for those who argue that the Dow 30 are on the whole stingy about their dividend payouts, it's important to remember that businesses have two main ways to return capital to shareholders. When you include both buybacks and dividends, you get a much different picture of what the Dow's most shareholder-friendly stocks are, with Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO) dropping out of the limelight and Home Depot (NYSE:HD) and Goldman Sachs (NYSE:GS) looking a lot more attractive.

Www
Source: Tax Credits, Flickr.

Going beyond yield
Portfolio manager Mebane Faber recently looked at the 30 stocks in the Dow from both of these perspectives. When you look only at the dividend yields of Dow stocks, the usual suspects rise to the top of the list: telecom stocks and pharmaceutical companies, along with technology companies like Intel and Cisco that have been more recent converts to the dividend-growth bandwagon. By contrast, financial companies generally fare poorly, with many banks still suffering from capital restrictions that limit their ability to pay higher dividend payouts.

But considering the impact of stock issuance and buybacks to consider what's known as net payout yield makes major changes to the order of the Dow 30. Telecom giant AT&T still ranks near the top of the list, as it combines substantial buybacks with the highest dividend yield in the Dow. But Intel and Cisco both fall from among the top-yielding Dow stocks into the bottom half of the Dow by net payout yield, as Intel makes only the smallest of net buybacks while Cisco actually issues more stock than it buys back.

By contrast, many stocks that seem stingy on a dividend-yield basis actually have extensive buyback policies. Home Depot, for instance, yields less than 2%, but when you add in the impact of buybacks, its net payout yield climbs to about 8%, third highest in the Dow. Even more impressively, Home Depot expects to ramp up its buyback program even further, with its $17 billion repurchase authorization through the fiscal 2015 year representing 15% of its current market cap.

Similarly, some financial stocks have had better luck getting authorization for stock buybacks than for permanent dividend increases. Goldman Sachs pays a dividend yield of just 1.3%, putting it in the bottom five of Dow stocks. But Goldman spent $6.17 billion on buybacks in 2013, repurchasing 39.3 million shares of its common stock. Adding in those buybacks pushes Goldman into the top five, with a net payout yield of more than 7%.

Dividend yields are still an important aspect of stocks, as they generally are more reliable and consistent than repurchase programs. Nevertheless, ignoring stock buybacks can lead you to make erroneous assumptions about which Dow stocks are actually the best at return capital to their shareholders.

What buybacks don't tell you
One of the dirty secrets that few finance professionals will openly admit is that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Goldman Sachs, Home Depot, and Intel and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers