Investing in stocks is risky business. That's why it's always nice to find a company that makes a habit out of rewarding you for taking on that risk of ownership. When everyone thinks about how stocks reward us, they always think about dividends, but share repurchases are another huge way companies effectively return money to shareholders.
Not all dividends and share repurchases are created equal, though. Sometimes a company is holding back, and other times it's spending more than it can afford and will probably have to restrict future generosity. To figure out which stocks on the Dow Jones Industrials Average (INDEX: ^DJI ) strike the best balance between the two, I looked at all the cash each component has returned through both vehicles over the past five years and divided it by the total earnings of all the companies over the same period.
She's giving you all she's got, captain!
These are companies that came closest to paying out all of their earnings, without quite crossing over the threshold of paying too much:
|Cisco Systems (Nasdaq: CSCO )
|ExxonMobil (NYSE: XOM )
|Merck (NYSE: MRK )
|General Electric (NYSE: GE )
On average, the Dow has returned 91% of its earnings to shareholders over the past five years, so these companies are pretty representative of the index's payout habits. Complain as we may about companies that don't reward us enough, that's not bad. While there is technically a little room left for more handouts, that figure about as high as we can reasonably expect.
Prudence pays off
While careful budgeting may not be sexy, it works in the long run. For instance, consider Alcoa, Home Depot, Bank of America, and Verizon. These Dow stocks all paid out more than they actually earned over the past five years, yet all that generosity didn't materialize much in the way of returns. A price-weighted portfolio of these four stocks would have returned -23% over the observed period, compared to -8% for the more prudent portfolio. Adjust for a market cap-weighted portfolio like the S&P, and the spread grows to -59% and -5.5% respectively.
We at the Fool love to see responsible cash management, which is why we added one of these stalwarts to our list of nine rock-solid dividend stocks . You can learn about the other eight elite companies that made the cut -- including some great non-Dow stocks -- by reading our special, totally free report.