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Buyback or Dividend: Which ETF Wins YTD & What Lies Ahead?

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Share repurchases and dividend payments are the two popular tools that the companies make use of to maximize shareholder value. President Donald Trump’s tax reform aided these corporate actions a lot in the past year as a great deal of tax savings led to higher buybacks and dividend payments.

In early 2018, per a Financial Times article, 400 earnings calls announced that 28% of companies intends to return cash to shareholders. Total shareholder return via buybacks and dividends for the fourth quarter of 2018 reached a record $342.8-billion mark, reflecting 39.1% growth from the fourth-quarter 2017 figure (read: How Will Tax Reform Affect Buyback and Dividend ETFs?).

Buybacks Outdid Dividends

Buybacks were given preference to dividends in“both the rate of growth and aggregate dollars spent," said Howard Silverblatt, senior index analyst, S&P Dow Jones Indices.

S&P Dow Jones Indices announced that the preliminary fourth-quarter 2018 S&P 500 stock buybacks touched a fourth successive record of $223.0 billion. This topples the previous record of $203.8 billion created during the third quarter of 2018 and marks a 62.8% increase from the year-ago period. There was an upheaval in the market in the fourth quarter, which dragged down stocks by an average 5.3%. This in turn gave a boost to buybacks.

Meanwhile, the S&P 500 dividends for the fourth quarter of 2018 totaled $119.8 billion, also a record rise of 3.5% sequentially. S&P 500 dividend growth almost came to a standstill, thanks to the waning benefits from Trump’s tax cuts.

The S&P 500 companies hiked payouts by an average of 8% post the approval of Trump’s corporate tax cuts while the average growth rate declined to a poor 2% after a year. Last year, oil drillers Anadarko Petroleum Corp. (APC - Free Report) and Pioneer Natural Resources Co. (PXD - Free Report) hiked dividend as much as 400% and 300%, respectively. This year, Home Depot (HD - Free Report) ruled the list as of February with an increment of 32%, per Bloomberg (read: Oil ETFs Surge as Chevron Plans to Buy Anadarko).

No wonder this trend made buyback ETFs like Invesco BuyBack Achievers ETF (PKW - Free Report) (up 21.8%) and SPDR S&P 500 Buyback ETF (SPYB - Free Report) (up 19.5%) beat dividend growth ETFs, namely SPDR S&P Dividend ETF (SDY - Free Report) (up 13.2%) and ProShares S&P 500 Dividend Aristocrats ETF (NOBL - Free Report) (up 13.5%) this year.

What Lies Ahead?

Let’s admit that the boost from tax cuts was a one-time event. And the receding benefits will dent the buyback and dividend hike spree. For example, Information Technology buybacks already dropped 25.5% in fourth-quarter 2018 from the third-quarter level. 

But then, the Fed is showing patience this year and the rates are likely to remain low. Dividend-paying securities are major sources of consistent income and should do well amid subdued rates. In this regard, investors can bank on some high-dividend ETFs like WBI Power Factor High Dividend ETF (WBIY - Free Report) andSPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , which can safeguard one’s portfolio even in turbulent times. Both funds yield more than 4% annually (read: A Bunch of Dividend ETFs Hitting All-Time Highs).

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