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Investors are always in search of stocks and ETFs with high dividend payout and increased buyback, in short, with activity that enhances shareholders’ value. With a low interest environment commanding most developed economies including the U.S., these products have been in high demand over the last few quarters.
A spate of downbeat U.S. economic data released lately and the ongoing Brexit-driven upheaval again pushed back the timeline of the Fed rate hike. This should brighten the appeal for stocks and ETFs that focus on shareholder value maximization.
Record Repurchase in Q1
U.S. companies have spent a record amount on buybacks in the last 12 months ending March 2016. Per the source, big U.S. companies shelled out $589.4 billion in repurchasing their own stocks, the highest ever one-year spending and representing a 9.5% year-over-year rise.
In Q1, repurchase tallied to $161.4 billion, up 12% year over year. This was the second-largest buyback trailing Q3 of 2007 when U.S. companies disbursed about $172 billion.
Decent Dividend Payout in Q1
In Q1 of 2016, dividends at U.S. companies rose about 4.6%year over year, but the first quarter's $11.04 per share payout for the S&P 500 is lower than $11.35 a share in Q4. With this, the S&P 500 snapped the trend of the seventh successive quarters of record payments. The slowdown mainly reflects dividend cuts by beleaguered energy companies.
Which Mode Wins?
While the above-mentioned figure suggests that the buyback has outweighed the dividend growth model in Q1, with the erstwhile hitting records and the latter losing momentum, the stock market performance depicts a different story.
As per analysts, buybacks are inflating securities’ price. This is because that if share counts fall, then there will be a rise in earnings per share and return on equity. Sometimes, repurchasing shares givesa positive indication about the health of a company and its confidence in the future value of its shares but at times it exaggerates the stock prices.
For example, Apple accomplished one of the largest stock buybacks in the first quarter of 2016. But “in the last three years, Apple’s net income increased 6% from 2013 to 2014, while EPS grew 13%.”
On the other hand, dividend growth is a more stable option, offering quality exposure. With this, investors are better-equipped to fight any market meltdown. With a Brexit-induced bear market likely to make the market rocky in the coming days, companies with dividend growth look to be better options than companies buying back shares (read: High Quality Dividend Stocks & ETFs for Uncertain Markets).
Moreover, the energy sector has recovered lately and is likely to sustain the momentum after the Brexit-triggered selloff wanes. If the energy sector regains its lost ground slowly, dividend growth should also pick up steam.
Buybacks vs Dividend Growth: Which ETF Has Performed Better?
Below we have presented two ETFs that focus on enhancing shareholder value. This way investors would have a clear idea about how these ETFs have performed lately and the one that is leading the way.
This ETF targets U.S. companies that have repurchased at least 5% or more of its outstanding shares in the trailing 12 months. PKW holds a basket of 213 securities (read: New Float Shrink ETF on the Horizon from TrimTabs?).
The fund is heavy on Consumer discretionary (22.8%) and industrials (22.7%). McDonald's Corp (4.9%), The Boeing Co (4.50%) and Qualcomm Inc (4.30%) are the top three holdings of the ETF, together forming roughly 14% of the fund’s assets. The fund charges 64 basis points as fees and lost about 3.9% in the last three months (as of June 28, 2016).
VIG holds stocks of high quality companies that have a record of increasing dividend year over year. It is currently home to 185 securities, with top allocations going to J&J (4%), Microsoft (3.9%) and Coca-Cola (3.9%).
The ETF is heavily weighted toward the industrials (23.8%), consumer goods (22.6%) and consumer services (18%) sectors. With an expense ratio of 0.09%, this is one of the cheapest funds in this space. The dividend yield at 2.75% is not remarkable. VIG shed about 0.8% in the last three months (as of June 27, 2016) (read: 3 Excellent ETFs for Growing Dividends).
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Face-Off: Dividend Growth & Buyback ETF
Investors are always in search of stocks and ETFs with high dividend payout and increased buyback, in short, with activity that enhances shareholders’ value. With a low interest environment commanding most developed economies including the U.S., these products have been in high demand over the last few quarters.
A spate of downbeat U.S. economic data released lately and the ongoing Brexit-driven upheaval again pushed back the timeline of the Fed rate hike. This should brighten the appeal for stocks and ETFs that focus on shareholder value maximization.
Record Repurchase in Q1
U.S. companies have spent a record amount on buybacks in the last 12 months ending March 2016. Per the source, big U.S. companies shelled out $589.4 billion in repurchasing their own stocks, the highest ever one-year spending and representing a 9.5% year-over-year rise.
In Q1, repurchase tallied to $161.4 billion, up 12% year over year. This was the second-largest buyback trailing Q3 of 2007 when U.S. companies disbursed about $172 billion.
Decent Dividend Payout in Q1
In Q1 of 2016, dividends at U.S. companies rose about 4.6%year over year, but the first quarter's $11.04 per share payout for the S&P 500 is lower than $11.35 a share in Q4. With this, the S&P 500 snapped the trend of the seventh successive quarters of record payments. The slowdown mainly reflects dividend cuts by beleaguered energy companies.
Which Mode Wins?
While the above-mentioned figure suggests that the buyback has outweighed the dividend growth model in Q1, with the erstwhile hitting records and the latter losing momentum, the stock market performance depicts a different story.
As per analysts, buybacks are inflating securities’ price. This is because that if share counts fall, then there will be a rise in earnings per share and return on equity. Sometimes, repurchasing shares givesa positive indication about the health of a company and its confidence in the future value of its shares but at times it exaggerates the stock prices.
For example, Apple accomplished one of the largest stock buybacks in the first quarter of 2016. But “in the last three years, Apple’s net income increased 6% from 2013 to 2014, while EPS grew 13%.”
On the other hand, dividend growth is a more stable option, offering quality exposure. With this, investors are better-equipped to fight any market meltdown. With a Brexit-induced bear market likely to make the market rocky in the coming days, companies with dividend growth look to be better options than companies buying back shares (read: High Quality Dividend Stocks & ETFs for Uncertain Markets).
Moreover, the energy sector has recovered lately and is likely to sustain the momentum after the Brexit-triggered selloff wanes. If the energy sector regains its lost ground slowly, dividend growth should also pick up steam.
Buybacks vs Dividend Growth: Which ETF Has Performed Better?
Below we have presented two ETFs that focus on enhancing shareholder value. This way investors would have a clear idea about how these ETFs have performed lately and the one that is leading the way.
PowerShares Buyback ETF (PKW - Free Report)
This ETF targets U.S. companies that have repurchased at least 5% or more of its outstanding shares in the trailing 12 months. PKW holds a basket of 213 securities (read: New Float Shrink ETF on the Horizon from TrimTabs?).
The fund is heavy on Consumer discretionary (22.8%) and industrials (22.7%). McDonald's Corp (4.9%), The Boeing Co (4.50%) and Qualcomm Inc (4.30%) are the top three holdings of the ETF, together forming roughly 14% of the fund’s assets. The fund charges 64 basis points as fees and lost about 3.9% in the last three months (as of June 28, 2016).
Vanguard Dividend Appreciation ETF (VIG - Free Report)
VIG holds stocks of high quality companies that have a record of increasing dividend year over year. It is currently home to 185 securities, with top allocations going to J&J (4%), Microsoft (3.9%) and Coca-Cola (3.9%).
The ETF is heavily weighted toward the industrials (23.8%), consumer goods (22.6%) and consumer services (18%) sectors. With an expense ratio of 0.09%, this is one of the cheapest funds in this space. The dividend yield at 2.75% is not remarkable. VIG shed about 0.8% in the last three months (as of June 27, 2016) (read: 3 Excellent ETFs for Growing Dividends).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>