A Fine Time to Embrace Merits of Shareholder Yield | ETF Trends

Investors seeking a different approach to shareholder rewards and generating income should consider the Principal Shareholder Yield Index ETF (PY) and the time is right to do just that.

PY seeks to provide investment results that closely correspond to the performance of the Nasdaq US Shareholder Yield Index. The index uses a quantitative model designed to identify equity securities (including value stock) of mid- to large-capitalization companies in the Nasdaq US Large Mid Cap Index (the “parent index”) that exhibit high degrees of sustainable, shareholder yield.

A key point that many investors miss out on is that dividends are only part of a more encompassing shareholder yield equation.

“However, dividends are only part of the picture,” writes Morningstar analyst Alex Bryan. “In fact, share repurchases have overtaken dividends as the primary way that firms distribute cash to investors. This fund takes a holistic view, accounting for cash returned to shareholders through dividend payments, net share repurchases, and debt repayment.”

PY ETF Power

The three components of shareholder yield are good measures for shareholder friendliness. The trifecta helps investors target companies with a history of dividend growth, low debt, and the ability to support equity prices through share buybacks.

“In theory, investors should be indifferent between whether a firm reinvests its cash or distributes it to shareholders,” notes Bryan. “What matters the most is the price paid relative to future free cash flows. This strategy and most that focus on dividend yield tend to favor stocks trading at low prices relative to their current cash flows. Historically, that type of value tilt alone has been a good bet, as stocks trading at lower valuations have tended to offer higher returns than their more expensive counterparts.”

While there is an ongoing debate regarding the superior method of shareholder compensation – buybacks or dividends – there is no denying dividend growth stocks have been less volatile while offering superior returns than those that do not grow dividends over the previous three decades. Additionally, there are compelling reasons to consider PY in the current low-yield environment.

“Yet there are at least three reasons to favor value stocks that make large distributions to their share­holders: ­1) Corporate managers who hold on to cash may be overly optimistic about their ability to earn better returns on their investments than their shareholders. That’s especially true of firms with limited growth opportunities. 2) Shareholder distributions impose discipline on managers by constraining their ability to engage in value-destructive empire-building and acquisitions, forcing them to focus on the investment opportunities with the highest expected returns. 3­) Buybacks may signal that managers believe their shares are undervalued, though that’s not always the case,” according to Morningstar’s Bryan.

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