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Are You Ignoring This Invisible Dividend?

Everybody loves a great dividend stock. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is jam-packed with them, and many a retirement plan hinges on the cash payments these 30 fabulous blue-chip stocks throw off.

But how often do you think about the Dow's most generous buyback plans? They're just as game-changing as the dividend yields, though they're hardly ever talked about.

Let me show you what I mean. Travelers (NYSE: TRV  ) offers a modest 2.6% dividend yield today, but the insurance giant has also invested a total of $2 billion in share buybacks over the last year. If you treat buybacks as direct shareholder returns, kind of like dividends, here's what the company's yield histories look like:

TRV Net Buyback Yield TTM Chart

TRV Net Buyback Yield TTM data by YCharts.

Travelers has the most generous buyback policy on the Dow, and the plan offers many times the shareholder value of the more commonly discussed payouts.

The same story applies to pharmaceutical titan Johnson & Johnson (NYSE: JNJ  ) , which sports the Dow's second-fattest buyback yield:

JNJ Net Buyback Yield TTM Chart

JNJ Net Buyback Yield TTM data by YCharts.

Mind you, the massive buybacks of the last two quarters are a special situation, as J&J used the acquisition of medical-device maker Synthes to shuffle its deck of domestic and international cash holdings. The buyback yield is likely to fall in the near future; there are no free lunches here.

And on that note, you'd be wise to look out for some hidden buyback traps.

Bank of America (NYSE: BAC  ) prints more shares than it buys back, effectively reducing its already soft 0.4% dividend yield even further. United Technologies (NYSE: UTX  ) just dipped below the negative line on the buyback chart, too. Shareholders of these companies are fighting a rising tide of dilutive shares.

UTX Net Buyback Yield TTM Chart

UTX Net Buyback Yield TTM data by YCharts.

It's certainly true that many companies end up simply burning cash and destroying shareholder value in share buybacks. But everyone is doing it, and you should pay attention to buyback plans when you're designing your income portfolio.

To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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  • Report this Comment On November 27, 2012, at 4:52 PM, constructive wrote:

    "the plan offers many times the shareholder value of the more commonly discussed payouts."

    Shareholder value is in the eye of the beholder. I think it would be more accurate to say that dividends don't offer any shareholder value and large buybacks may offer positive or negative shareholder value, depending on the price paid.

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