Many investors simply monitor yield view bonds or common stocks, but a more encompassing solution is shareholder yield, which can be sourced via the Principal Shareholder Yield Index ETF (PY).
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.
“The shareholder yield investment strategy uses the three ways a company can return cash to shareholders: cash dividends, stock repurchases, and debt reduction, to find investment ideas,” according to Quant Investing.
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.
Historical data confirm shareholder yield is a winning long-term strategy.
“In the great September 2017 article 7 Traits for Investing Greatness Jim O’Shaughnessy summarised an 80 year (1927–2009) backtest of the shareholder yield investment strategy,” notes Quant Investing. “Overall 961 (777+184) rolling 3-year periods, the top 10% Shareholder Yield companies beat other large stocks 81% of the time by an average 3.24% per year. If you extend the test to all 877 (855+22) rolling 10-year periods, you would have beaten the market 97% of the time by 3.41% per year.”
PY, which debuted more than four years ago, “favors companies with the strongest quality characteristics and goes beyond cap weighting for further diversification,” according to Principal.
The fund holds 129 stocks, roughly 46% of which hail from the financial services and industrial sectors. Technology and consumer discretionary names combine for over 26%. Data also suggest shareholder yield as a strategy trumps dividend yield.
“JP Morgan Cazenove in their 23 April 2013 publication Quant Forensics: Volume 5 Europe Equity Research researched if replacing Dividend Yield with Shareholder Yield could improve the performance of a defensive investment strategy,” according to Quant Investing. “Annual long returns increased substantially compared to a dividend yield investment strategy. Also, the maximum drawdown declined by 50%.”
For more on multi-factor strategies, visit our Multi-Factor Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.