What Dow Dividend Investors Must Know About Buybacks

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.

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.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2014, at 12:05 PM, jeshuey wrote:

    If one is a dividend investor, what matters most is whether you are able to either reinvest your return or spend it. That your ownership interest grows by one ten-thousandth of one percent is immaterial, making the above calculations of "return" largely superfluous.

  • Report this Comment On January 19, 2014, at 5:06 PM, SpinningFree wrote:

    This is a good article with a great point, but I'm not convinced that the amount of money spent on share buybacks tells the whole picture tells the true "net payout" story; some companies compensate their higher level employees with either options or an equity stake, and some of the buybacks might be done to keep the share count at the same level. For example, Goldman Sachs' share count was only reduced by 16.5 million in the 2013 Calendar Year (source: Google Finance). Isn't it the net reduction of shares outstanding that we actually care about?

  • Report this Comment On January 20, 2014, at 11:43 AM, TXObjectivist75 wrote:

    It would be interesting if you researched net buybacks to see if they resulted in larger dividend increases in subsequent years.

  • Report this Comment On January 20, 2014, at 11:56 PM, lonewolf wrote:

    I don't agree with this article at all. Buybacks go to "Authorized Unissued" on the books of the company. Buying back "5 million dollars" seems like a lot, but not when the float is a few BILLION. But the dividend yield is based on stock price and buybacks do not move the stock price enough to improve the yield.

    I worked for 20 years at Transfer Agents actually doing the buybacks. So What if a company buys back a few million, but then turns around and issues twice that figure to Executives. When they run out of shares they change the Charter amount and just keep issuing. If buybacks help dividend yields, why is the opposite not true?

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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