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Buyback & Dividend ETFs In Light of Inflation Reduction Act
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U.S. corporate buybacks have been robust in recent months and have provided enough support to the stock market. With moderate interest rates boosting profits and values, S&P 500 companies repurchased a record $881.7 billion of their own stock in 2021, up from $519.8 billion in 2020, according to S&P Global data, as quoted on CNBC.
Plus, Wall Street has been massively down this year with the S&P 500 losing 15.9% so far (as of Aug 30, 2022) and 11.4% past year. Such suppressed stock pricing led companies to buy back their shares at cheap prices. — Apple, Google parent Alphabet, Facebook parent Meta, Microsoft and Bank of America — comprised 25% of the dollar value of stock buybacks over the past year, the CNBC article noted.
Inflation Reduction Act’s Impact
The Inflation Reduction Act levies a 1% excise tax on the market value of net corporate shares repurchased beginning in 2023. This means buybacks may lose some momentum. Buyback volume has topped dividends in most years since 1997, per taxpolicycenter. The article went on to explain that repatriation of offshore earnings activated by the Tax Cuts and Jobs Act led to a spike in buybacks in 2018 and 2019.
But Tax Policy Center estimated that a 1% tax on share repurchases may now result in a 1.5% increase in corporate dividend payouts. “And increased dividends may have an unexpected impact, depending on where investors are holding these assets, said Alex Durante, federal tax economist at the Tax Foundation,” as quoted on CNBC.
Goldman believes buybacks could be pulled forward this year as companies look to evade new tax, as quoted on a CNBC article. So, investors can expect a surge in buybacks till December 2022 and a spike in dividend payouts from 2023.
Against this backdrop, below we highlight buyback and dividend ETFs that are good tools for shareholders’ value maximization.
The underlying NASDAQ US BuyBack Achievers Index comprises of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The fund charges 64 bps in fees.
The underlying Morningstar US Dividend and Buyback Index is composed of U.S. stocks with a history of dividend payments and/or share buybacks. The fund charges 25 bps in fees.
The underlying S&P 500 Dividend Aristocrats Index targets companies that are currently members of the S&P 500, have increased dividend payments each year for at least 25 years & meet certain market capitalization & liquidity requirements. The fund charges 35 bps in fees.
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. The fund charges 35 bps in fees.
The underlying S&P U.S. Dividend Growers Index consists of common stocks of companies that have a record of increasing dividends over time. The fund charges 6 bps in fees.
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Buyback & Dividend ETFs In Light of Inflation Reduction Act
U.S. corporate buybacks have been robust in recent months and have provided enough support to the stock market. With moderate interest rates boosting profits and values, S&P 500 companies repurchased a record $881.7 billion of their own stock in 2021, up from $519.8 billion in 2020, according to S&P Global data, as quoted on CNBC.
Plus, Wall Street has been massively down this year with the S&P 500 losing 15.9% so far (as of Aug 30, 2022) and 11.4% past year. Such suppressed stock pricing led companies to buy back their shares at cheap prices. — Apple, Google parent Alphabet, Facebook parent Meta, Microsoft and Bank of America — comprised 25% of the dollar value of stock buybacks over the past year, the CNBC article noted.
Inflation Reduction Act’s Impact
The Inflation Reduction Act levies a 1% excise tax on the market value of net corporate shares repurchased beginning in 2023. This means buybacks may lose some momentum. Buyback volume has topped dividends in most years since 1997, per taxpolicycenter. The article went on to explain that repatriation of offshore earnings activated by the Tax Cuts and Jobs Act led to a spike in buybacks in 2018 and 2019.
But Tax Policy Center estimated that a 1% tax on share repurchases may now result in a 1.5% increase in corporate dividend payouts. “And increased dividends may have an unexpected impact, depending on where investors are holding these assets, said Alex Durante, federal tax economist at the Tax Foundation,” as quoted on CNBC.
Goldman believes buybacks could be pulled forward this year as companies look to evade new tax, as quoted on a CNBC article. So, investors can expect a surge in buybacks till December 2022 and a spike in dividend payouts from 2023.
Against this backdrop, below we highlight buyback and dividend ETFs that are good tools for shareholders’ value maximization.
Invesco BuyBack Achievers ETF (PKW - Free Report)
The underlying NASDAQ US BuyBack Achievers Index comprises of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The fund charges 64 bps in fees.
iShares U.S. Dividend And Buyback ETF (DIVB - Free Report)
The underlying Morningstar US Dividend and Buyback Index is composed of U.S. stocks with a history of dividend payments and/or share buybacks. The fund charges 25 bps in fees.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL - Free Report)
The underlying S&P 500 Dividend Aristocrats Index targets companies that are currently members of the S&P 500, have increased dividend payments each year for at least 25 years & meet certain market capitalization & liquidity requirements. The fund charges 35 bps in fees.
SPDR S&P Dividend ETF (SDY - Free Report)
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. The fund charges 35 bps in fees.
Vanguard Dividend Appreciation ETF (VIG - Free Report)
The underlying S&P U.S. Dividend Growers Index consists of common stocks of companies that have a record of increasing dividends over time. The fund charges 6 bps in fees.