Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some companies offering significant dividends and stock buybacks to your portfolio but don't have the time or expertise to hand-pick a few, the Cambria Shareholder Yield ETF (NYSEMKT:SYLD) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often feature lower expense ratios than their mutual fund cousins. This ETF, focused on dividends and stock buybacks, sports an expense ratio -- an annual fee -- of 0.59%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This dividends-and-stock-buybacks ETF is too young to have a meaningful track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why dividends and stock buybacks?
It's smart to seek out healthy dividend-paying stocks, as they will deliver in good times and bad, and dividends tend to grow over time, too. Stock buybacks can also deliver for shareholders, reducing a company's share count so that remaining shares are worth more. (Not all stock buybacks are smart, though. A company buying back overvalued shares is actually destroying value.)
More than a handful of companies offering dividends and stock buybacks had strong performances over the past year. Seagate Technology (NASDAQ:STX) surged 63% and yields 3.1%. (It has more than quadrupled its dividend payout over the past five years.) Alongside rival Western Digital, Seagate Technology controls 85% of the hard-drive market. A shift toward 3-D NAND in the flash memory industry is likely to boost Seagate's fortunes, and its memory offerings can serve the growing big-data industry well. Between dividends and stock buybacks, Seagate returns about 70% of its operating cash flow to shareholders.
Marvell Technology (NASDAQ:MRVL) jumped 58% over the last year and yields 1.5%. The chipmaker is benefiting from the strong growth in storage and mobile communications, as it counts among its customers leaders in various industries. (Seagate and Western Digital, for example, generated 36% of its 2013 revenue.) The growing LTE market in China will also serve as a tailwind for Marvell. The company was recently fined $1.5 billion in a patent lawsuit, but that was far less than was originally demanded, and Marvell is appealing the decision. The company topped expectations in its fourth quarter.
Frontier Communications (NASDAQ:FTR) gained 47% and yields a hefty 7.2%. It carries considerable debt, though, which could threaten that payout, and it doesn't appear to be performing as well as its peers. (Big interest payments can constrain stock buybacks, too.) Not helping its debt situation is its decision to buy AT&T's wireline business and statewide fiber network in Connecticut for $2 billion in cash. Frontier has been shifting its focus from landline operations toward higher-margin businesses such as broadband and serving business customers. Its fourth quarter featured roughly flat revenue, which was better than the loss that had been expected, while its earnings also delivered a surprise by growing a bit.
L-3 Communications (NYSE:LLL) advanced 44.5% and yields 2.1%. While the company is more nimble than some rivals, it's also quite dependent on the U.S. government for much of its revenue and has been hurt by military spending cutbacks. Still, L-3 has been winning lots of defense contracts lately. Over the past few years, though, revenue, free cash flow, and earnings have been shrinking, as have operating margins. Bears don't expect 2014 to be as strong for the company as 2013.
The big picture
If you're interested in adding some companies offering dividends and stock buybacks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.