There's no sugarcoating just how important dividend stocks have historically been to investors. According to a report put out by J.P. Morgan Assert Management in 2013, publicly traded companies that initiated and grew their payout between 1972 and 2012 delivered an average annualized return of 9.5%. Comparatively, non-dividend-paying companies returned just 1.6% per year during this same stretch.
The magnitude of this bifurcation really shouldn't surprise anyone. After all, dividend-paying stocks are often time-tested and profitable businesses, making them something of a beacon for long-term investors and income seekers.
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If you're overlooking shareholder yield, then you're making a big mistake
But what often gets overlooked when focusing on yield is the idea that it can only be derived from dividends.
Publicly traded companies have a handful of ways to try to bolster shareholder value, and one of them is to repurchase their own stock. By buying back stock, public companies are reducing their outstanding share count, which in turn can have a positive impact on share price and earnings per share. While not all buybacks turn out to be smart moves, share repurchases are, nevertheless, another means by which companies can return capital or create value for their shareholders.
While most dividend yields for brand-name stocks tend to fall in the pedestrian 1% to 4% range, the addition of stock buybacks can supercharge the benefits that shareholders are receiving. The following three brand-name stocks all sport shareholder yields (i.e. dividends paid plus share buybacks, divided by market cap) of more than 11%.
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Bank of America
There are a number of reasons Warren Buffett loves owning money center banks, but the biggest just might be the shareholder yield offered by big banks -- especially his second-largest holding, Bank of America (BAC 1.53%).
Last year, following its passage of the Federal Reserve's annual stress test, Bank of America received approval to return roughly $6 billion in dividend payouts and $31 billion in share repurchases to investors over the next 12 months. That's a whopping $37 billion capital return plan for a company that closed this past Tuesday, Jan. 21, with a market cap of $302.7 billion. Assuming BofA holds to its word, this works out to a shareholder yield of 12.2%.
With litigation expenses tied to the Great Recession now in the rearview mirror, and Bank of America having adequately built up its capital in case of another severe recession, the banking giant has been able to turn its attention to its bread and butter moneymakers. We've seen loans and deposits climbing, all while Bank of America has steadily chipped away at its noninterest expenses. In particular, it's focused its attention on reducing its physical branch count and emphasizing digital banking to lower its average transaction costs and speak to a younger, tech-friendly generation of consumers.
While the Federal Reserve's decision to cut interest rates three times in 2019 is liable to adversely impact BofA's interest income in the near-term, I wouldn't expect any significant reduction in Bank of America's shareholder yield anytime soon.
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Foot Locker
Though it's not exactly been a top-performer of late, footwear and accessories retailer Foot Locker (FL -0.18%) is no slouch in the capital return department. In fact, of the three brand-name companies I'm discussing here, its 3.8% dividend yield is by far the highest.
Through the first nine months of 2019, Foot Locker wound up repurchasing $300 million worth of its own stock, as well paid out about $125 million in dividends. Assuming Foot Locker once again divvies out roughly $41 million in dividends in the fourth quarter, and spends an average of $100 million on share repurchase, its shareholder yield will be 13.7%. Even if the company chooses not to rebuy a single share of stock in the fourth quarter, its 2019 shareholder yield would still be an impressive 11.3%.
While there are clear concerns for Foot Locker as the retail world continues to transition to a digital ecosystem, investors might be overlooking the steps the company it taking to mitigate any pain. Foot Locker has not only been invested in its e-commerce presence, but it's also utilizing apps for in-store use to connect with more (and younger) consumers.
Furthermore, Foot Locker's push into potential higher-growth areas has been paying dividends, in the metaphorical sense. In particular, Foot Locker's focus on kids footwear led to a double-digit comparable sales increase in this category during the third quarter from the previous year. While the company's high-growth days are long gone, Foot Locker's ability to return value to shareholders should remain well above par.
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Devon Energy
Last, but not least, oil and natural gas producer Devon Energy (DVN -0.46%) has been masking its pedestrian dividend (currently a 1.4% yield) with a massive share repurchase plan that's designed with shareholders in mind.
Over the previous four quarters, Devon Energy has paid out $143 million to shareholders in the form of a dividend. Meanwhile, its share repurchases have totaled $759 million, $998 million, $187 million, and $561 million, between Q4 2018 and Q3 2019, respectively. That's, collectively, $2.51 billion spent on share buybacks, or $2.65 billion, including dividends, returned to shareholders over just the past four quarters. With a market cap of $9.6 billion, this works out to an incredible shareholder yield of 27.6%!
As my energy-focused colleague Matt DiLallo recently noted, Devon Energy has completely reshaped its business over the past two years. By selling off its Barnett shale assets, its Canadian assets, and its interest in EnLink Midstream, the company was able to significantly pay down its debt, as well as increase its share buyback program to $6 billion. Through the third quarter, it had reduced its outstanding share count by 28% since the beginning of 2018. This is why its shareholder yield is so incredibly high.
But what might be most important here is that Devon Energy has kept its lowest-cost assets. According to the company, it only needs West Texas Intermediate (WTI) crude to stay above $48 per barrel to produce healthy free cash flow, after accounting for drilling costs and its dividend. Right now, WTI crude is going for more than $58 a barrel, and it recently hit its highest market since April 2019, following the U.S. strike on an Iranian general. Translation: Devon Energy's cash flow should surpass expectations in 2020, potentially leading to substantial share repurchases this year, and in 2021.
