Corporations have issued share buybacks and dividends to make company shares more attractive to investors. However, dividend-focused exchange traded funds are winning out the battle of shareholder value.
The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), which tracks U.S. companies that have repurchased 5% or more of shares over the past 12 months, was down 0.4% year-to-date. In contrast, the iShares Select Dividend ETF (NYSEArca: DVY), which includes stocks with consistently high dividend yields, increased 9.3% so far this year.
As buyback-heavy stocks underperform, “we think companies will shift to cash return via dividends,” BofA Merrill Lynch’s Savita Subramanian said in a note, reports Alex Rosenberg for CNBC.
The rise of the dividend investment theme may be attributed to diminished appetite for risk and falling rates.
In a year marked by heightened volatility, investors have shied away from riskier investments and turned to the relative stability of dividend-paying stocks.
Additionally, as the Federal Reserve takes on a more dovish stance and economic concerns pushed on bond yields, with benchmark yields on 10-year Treasures back below 2.0%, investors may find dividend-paying companies a more attractive alternative. For instance, DVY has a 3.21% 12-month yield.
As the Fed pushes kicks the can down the road, “dividend stocks are going to be the name of the game,” RJO Futures strategist Phillip Streible told CNBC.
Moreover, Subramanian believes we may see higher dividend yields since the “dividend payout ratio is still near the low end of its historical range,” and an aging demographic means “the demand for yield will only grow.”
[related_stories]Erin Gibbs of S&P Investment Advisory also pointed out that the outperformance of dividend-paying stocks isn’t anything new.
Over the past 15 years, relative returns show that “about two-thirds of the time, you’re better off buying high-dividend stocks than high buybacks,” Gibbs said on CNBC.
At the crux of the problem, stock repurchases could cost future growth, potentially trading short-term performance for long-term gains. According to an analysis of FactSet indices since 2005, companies that spend the most on buybacks in the S&P 1500 have underperformed those that have not had a single buyback, reports Mark Fahey for CNBC. While stock buybacks helped boost gains over the short run, the effect was negative 36 months after a buyback announcement.
iShares Select Dividend ETF