Income-minded ETF investors can consider a dividend strategy that taps into the direct and indirect methods that companies can potentially use to distribute cash to shareholders, along with the metric commonly referred to as “shareholder yield.”
In the recent webcast, The Case for Shareholder Yield in Portfolios, Meb Faber, Co-Founder and CIO, Cambria Investment Management, highlighted the pricey valuations in the prolonged U.S. market rally. Specifically, the U.S. S&P 500 exhibited a Shiller CAPE Ratio of 31 as of the end of June 2019, which was comparable to the same valuations witnessed back during the dotcom bubble. In this type of environment, it is harder for investments to find opportunities without taking on further downside risks.
Alternatively, Faber argued that investors may find value in companies that maximize their return on investment, or those that provide cash dividend, buy back stocks, pay down debt, execute mergers and acquisitions, and reinvest in the business.
Faber explained that yield-seeking investors still look to the markets and see a need for an investment that’s going to provide not only potential income, but potential growth too. Unfortunately, investors have been piling into dividend funds for years now in their search for yield, so some may be worried that this has left them with few reasonably-valued opportunities. If one invests in a potentially overvalued dividend fund today and this bull market finally runs out of steam tomorrow, then an investor is risking serious losses. On the other hand, keeping money on the sidelines is returning zero growth.
“We believe there is an answer, and one we feel is a good one. Income and growth are still possible, even in this market, though admittedly, harder to find,” Faber said.
“We humbly request you consider the Cambria Shareholder Yield Suite of ETFs,” he added.
Cambria has engineered a suite of Shareholder Yield ETFs to help investors find exposure to quality value stocks that have returned the most cash to shareholders via dividends and buybacks relative to the rest of the U.S. stock universe. Specifically, investors can look to the Cambria Shareholder Yield ETF (NYSEArca: SYLD), Cambria Emerging Shareholder Yield ETF (EYLD) and Cambria Foreign Shareholder Yield ETF (FYLD).
The underlying indices consist of stocks with high cash distribution characteristics and are comprised of the companies with the best combined rank of dividend payments and net stock buybacks, which are the key components of shareholder yield. Additionally, the underlying indices also screen for value and quality factors, including low financial leverage.
“Our funds universally have a higher dividend yield than the category average. But remember, we’ve engineered our ETFs to reflect total cash distributions to investors from dividends and buybacks. When management rewards investors with buybacks, we wouldn’t see that value-transfer reflected in the dividend yield. Therefore, while our funds have a higher yield currently, we shouldn’t necessarily expect them to be leading this category,” Faber added.
Some critics may argue that buybacks are a gimmick that help companies prop up prices regardless of valuations, so dividend hunters should just focus on high yields. However, Faber contended that investors may need to pay more attention to buybacks. Corporate share buybacks can be an effective way for managers to return profits to shareholders, similar to dividends, but share repurchases do not trigger the taxable event that occurs with dividends.
“This means shareholders are receiving value, but it’s subtler – generally camouflaged in the asset’s market price, rather than the obvious dividend payment that appears in your brokerage account one day,” Faber said. “But that doesn’t mean the value isn’t there, it’s just in a different form.”
The shareholder yield strategy incorporates buybacks as a supplement and also includes a focus on dividends. Cambria also has a screen for dividends but believes that combining good dividend yields with good buyback yields to complement the broader “shareholder yield” objective.
“We believe shareholder yield is a good indicator of an investment’s long-term potential,” Faber added.
Other money managers have also incorporated this sentiment. For example, J.P. Morgan has stated that the single best measure of value is arguably shareholder yield or a combination of dividends, buybacks and net issuance. Societe Generale reported that a shareholder yield strategy had historically beaten the market in 17 of the previous 20 years, whereas a dividend yield strategy had beaten the market in only 9 of those years.
Financial advisors who are interested in learning more about yield-generating strategies can watch the webcast here on demand.