While paltry fixed-income yields have had investors on the prowl for high-dividend stocks, James O’Shaughnessy’s firm says they should be looking in another place for yield.
“Though dividend yield works very well internationally, investors in U.S. stocks should instead focus on shareholder yield, a factor we have long advocated that has provided considerably stronger returns for U.S. stocks for more than 80 years,” writes Patrick O’Shaughnessy on O’Shaughnessy Asset Management’s web site. Shareholder yield is the total of a company’s dividend yield and its share buyback yield. “Our research shows that buybacks are very strong buy indicators — while share issuances (primary or secondary offerings) are a bad sign for the stock’s returns in the following year,” O’Shaughnessy writes.
The benefit of shareholder yield over dividend yield is its flexibility, O’Shaughnessy adds — what’s important is that firms are returning cash to shareholders, regardless of whether it is through dividends or stock buybacks. Back-testing data back to 1927, he says OSAM found that the top decile of stocks based on dividend yield returned an average of 11.72% annualized, vs. an all stocks benchmark of 10.37%. The top decile based on shareholder yield, however, was even better, with annualized returns of 13.12%.
O’Shaughnessy also discusses why stock buybacks are more prevalent in the U.S. than many other foreign markets, and looks at how returns can be boosted by combining shareholder yield with other fundamental variables. For example, using data that goes back to 1963, OSAM found that taking the top quintile of stocks based on shareholder yield, and then taking from that group the top quintile based on EBITDA/Enterprise Value, an investor could have posted annualized returns of 17.31%.
“We believe that now is an excellent time to be buyers of stable, market- leading U.S. firms — those firms that are rewarding their shareholders with large cash transfers — at discount prices,” O’Shaughnessy concludes. “We encourage yield-seeking investors to consider more than just dividends alone. Familiar companies like Lockheed Martin, Intel, Travelers, and The Gap are good examples of stocks that meet these criteria at present. By owning these types of stocks, investors can benefit from a yield factor that has proven to be particularly effective throughout lengthy time periods and across a variety of market conditions.”