Dividend exchange traded funds have been popular vehicles this year as companies boost payouts, but investors may also want to consider an ETF tracking firms that are buying back shares.
PowerShares BuyBack Achievers (NYSEArca: PKW) is the best ETF option dedicated to firms that buy back their own shares, writes Michael Rawson, ETF analyst with Morningstar. PKW holds stocks that have bought back 5% or more of its shares outstanding in the prior year, including International Business Machines (NYSE: IBM) and Wal-Mart (NYSE: WMT). The fund has an expense ratio of 0.60%.
Firms with extra cash on hand can either invest back into their business, dish out dividends or buy back shares.
About 75% of stocks in the S&P 500 pay dividends over the last few decades. Between 1999 and 2004, firms spent equivalent amounts on dividends and buybacks, but between 2004 and 2010, they spent 60% more on buybacks, according to the report.
According to a study conducted by Bali, Demirtas and Hovakimian, firms that bought back shares outperformed firms that issued new shares by 6% between 1972 and 2002.