Dividends and share buyback plans are the primary avenues companies use as shareholder rewards. An array of exchange traded funds make those themes accessible, but few emphasize both buybacks and dividends.
The iShares U.S. Dividend and Buyback ETF (CBOE: DIVB), which debuted last week, provides exposure to dividend-paying stocks as well as companies that are consistent buyers of their own shares. The new ETF follows the Morningstar US Dividend and Buyback Index.
That index, which is just six weeks old, but is back-tested to June 2006, “is designed to provide exposure to U.S.-based companies that return capital to shareholders through either dividend payments or share buybacks. The index consists of companies providing the largest dividend and buyback programs in the market by dollar value. In aggregate, index constituents represent 90% of the total shareholder capital distribution of the Morningstar US Market Index benchmark,” according to Morningstar.
DIVB allocates over 21% of its weight to technology stocks, the new ETF’s largest sector exposure. In recent years, technology has been home to some of the largest share repurchase programs among S&P 500 member firms. Additionally, the sector has become formidable force when it comes to dividend growth. Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT) are DIVB’s two largest holdings, combining for just over 8% of the ETF’s weight.
In recent decades, share buybacks have emerged as a significant mechanism that corporations use to supply excess cash flow to shareholders. Buybacks now rival dividends as the dominant source of payout in the U.S. stock market,” said Morningstar. Morningstar Investment Management research provides evidence that total payouts (dividends plus buybacks) are the key drivers of long-run stock market returns, and advocates for their use in lieu of pure dividends in long-term valuation of U.S. equities.”