These securities being in fashion these days makes sense considering the fact that the Fed has been keeping interest rates near rock-bottom levels and assuring investors at its recent policy meet that it has no intention to hike interest rates at least for this year.
Besides paying out dividends, the five-year long bull market was marked by another trend from corporations; buying back their own shares. Buybacks have been a great contributor to this Bull Run as well.
In the absence of robust revenue growth options, U.S. companies seem to prefer buybacks and dividend payouts to boost shareholder returns. 2013 was the fourth consecutive year of double-digit dividend growth as well, suggesting that both routes are extremely popular with corporate managers.
Dividends & Buybacks Grow at Record Pace
U.S. companies have spent a record amount of money for buybacks and dividends during the first quarter of 2014. Per S&P Dow Jones Indices, U.S. companies have returned $241 billion to shareholders through share buybacks and dividend payouts in the first quarter, surpassing the previous record of $233 billion set in the third quarter of 2007.
What’s in it for investors?
Dividends provide a steady stream of income and have accounted for more than 40% of total market returns over the past eight decades. Not only do they provide safety in the form of payouts, dividend paying companies are also comparatively less volatile and more mature with solid cash flows. Thus they provide investors with the best of both worlds (read: 3 Excellent Dividend ETFs for Growth and Income).
These companies also return cash to investors by way of share buybacks. The amount spent by companies to buy back their own shares has even exceeded the amount they pay for dividends.
While S&P 500 companies have paid $1.3 trillion in dividends, they have spent a whopping $1.9 trillion to repurchase their own shares, from the first quarter of 2009 through the first quarter of 2014.
For example, the tech giant Apple was the biggest repurchaser of shares, shelling out $18 billion on buybacks in Q1 2014, breaking past its previous record of $16 billion in Q2 2013. Albeit they were under pressure from activist shareholders who pointed out that the company was foolishly sitting on a gigantic pile of cash that was providing investors with no return.
Though the increased level of buybacks and dividends has certainly made the cash on S&P 500 companies’ balance sheets to come off their record highs, they still have 90 weeks of net income sitting on their books, as per a Financial Times report.
“I expect this trend of greater shareholder return to continue throughout 2014, as activists remain strong, interest rates low and companies awash in cash,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Moreover, with the latest assertions from the Fed chair that the current low interest rate environment will remain intact for quite some time to come, companies might continue to borrow cheaply from the bond market and use the proceeds for buybacks.
Thus with this trend of returning earnings to shareholders in the form of dividends and buybacks expected to continue, we have presented below three ETFs that focus on enhancing shareholder value. These can be excellent choices for long-term investors, and for those that want to cash in on this trend towards buybacks and dividends:
Cambria Shareholder Yield ETF (NYSEARCA:SYLD)
SYLD is an actively managed fund which focuses on companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases, or by reducing their leverage.
The fund holds a well-diversified portfolio of 100 stocks with a tilt towards large cap stocks. Financials, Technology and Industrials occupy the top three spots in terms of sector exposure.
The ETF charges a reasonable 59 basis points as expenses and has gained 29% in the past one year and 5% since the start of the year (read: 3 ETFs you can love forever).
ProShares S&P 500 Aristocrats ETF (NYSEARCA:NOBL)
The recently launched product follows the S&P 500 Dividend Aristocrats Index that focuses on companies that have increased dividend payments annually for at least 25 years.
This focus results in the fund holding 54 companies which are weighted equally in the portfolio. Consumer Staples forms the major chunk, followed by Consumer Discretionary and Industrials. The product has an expense ratio of 35 basis points and has returned 5% this year.
PowerShares Buyback ETF (NYSEARCA:PKW)
PKW tracks the NASDAQ U.S. Buyback Achievers Index, holding a basket of 176 securities. The fund provides exposure to companies that have repurchased their common shares by at least 5% in the trailing 12 months.
Home Depot Inc, AT&T and Oracle are the top three holdings of the ETF, together forming roughly 15% of fund assets. The fund charges 71 basis points as fees and has returned 30% in the past one year.
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