There’s often a debate between the efficacy of buybacks and dividends, but some ETFs, such as the Principal Shareholder Yield Index ETF (PY), ensure investors don’t have to isolate just one of those specific concepts.
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 good news is, you don’t really need to take sides. Whether through dividend payments or increased ownership as a result of share repurchases, investors benefit. And it’s often not an either-or proposition anyway: Many companies pay dividends and also buy back shares,” according to a recent Morningstar note.
PY Potency
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.
“Since 1982, when regulators started to allow companies to more freely invest in their own stock, firms have increasingly elected to use cash to buy back their own shares, and most of those companies also pay a dividend,” according to Morningstar.
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.
“In large part because of the rise in the popularity of buybacks, the U.S. market’s aggregate dividend yield has fallen from its historical 3%-6% range,” notes Morningstar. “With the notable exception of the 2007-09 financial crisis, when depressed prices sent yields up, market-level yield in the United States has mostly hovered around 2%.”
PY, which recently turned four years old, allocates about two-thirds of its combined weight to financial services, consumer discretionary and technology stocks. The fund has a distribution yield of 2.57%.
“From a company’s point of view, opportunistic share repurchases offer much greater flexibility than dividends do, which is one of the main reasons they have become so popular over the past several decades,” notes Morningstar. “Dividends, by comparison, are more rigid: Once a company commits to paying a regular dividend it is usually loath to cut it because investors perceive a dividend cut to mean that a company is in tough financial straits.”
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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.