Investors looking to tap into the benefits of shareholder yield have multiple exchange traded funds to consider. One of the leaders of the pack is the Cambria Shareholder Yield ETF (SYLD).
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.
SYLD “is a compelling value strategy that targets stocks making large cash distributions relative to their price. Most strategies that do that focus exclusively on dividends,” said Morningstar analyst Alex Bryan in a recent note. “However, dividends are only part of the picture. 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.”
Shareholder Yield Benefits
Dividend stocks have historically been a great way for investors seeking another avenue for yields and value, but there is more than one way to gain exposure to companies that redistribute their cash to shareholders.
Instead of just focusing on dividend payments alone, the shareholder yield ETF strategies invest stocks that couple strong dividend payments with share repurchases and debt paydown. The fund manager believes that this type of screening process may be a better way to identify stocks that possess strong cash flows and that have the potential to reward shareholders with higher yields.
“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 Bryan.
Actively managed, SYLD features a debt reduction screen that should serve investors well over the long-term as it steers the portfolio toward higher-quality fare.
SYLD “reduces exposure to firms that are issuing debt to repurchase their shares or pay dividends, which is not necessarily in shareholders’ best interest. To mitigate exposure to stocks with deteriorating fundamentals, the managers filter out stocks with poor momentum and trend,” notes Bryan.
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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.