Shareholder Yield vs. Dividend Yield

Portfolio Update July 2020

It’s been a busy last few weeks for me, so I haven’t had the chance to post anything on YouTube. Nevertheless, I did want to update you all on the performance of my experimental portfolios.

If you’ve watched my video on shareholder yield vs. dividend yield, you know that I’m not a fan of dividend yield as a primary investment metric. I’m not a fan of any single metric to be used exclusively for investment decisions, but if I were to rely on one, it definitely would not be dividend yield.

Why Shareholder Yield?

From my research, shareholder yield is a far better metric. It rewards companies that repurchase shares and penalize companies that dilute shareholders with equity issuance.

Buybacks have gotten a lot of flak for being “financial engineering.” Regardless of what your opinion is on buybacks, the reality is that they are one-way companies in today’s world return cash to shareholders. I’m not necessarily suggesting you should prefer buybacks over dividends, but you should definitely prefer buybacks over equity issuance. That’s where shareholder yield comes into play. It tells you the total amount of money a company is returning to shareholders. A company with a 1% dividend yield and a 7% buyback is returning 8% per year to shareholders. A company with a 10% dividend yield and an 8% equity issuance has a 2% shareholder yield.

If choosing between these two stocks, the one with the lower dividend yield would be the obvious choice because they are also increasing your ownership of the company by 7%. The 10% dividend yield stock is inferior because they are diluting your share ownership by 8%. So that 10% yield is nice, but it’s basically like getting a $10 bill from your left hand and giving $8 back. It’s a net $2 gain to you; the cash flow may be $10, but the income is only $2.

If you own a stock that is issuing equity, you are becoming a smaller and smaller owner of that company. If they pay a dividend in addition to issuing equity, it’s an almost indefensible position (except for REITs; they issue because they must payout at least 90% in dividends to retain their tax advantage). In what universe does that make any sense? None.

If you haven’t seen the video, you can watch it here. For now, let’s get on to portfolio performance.

How Were These Put Together?

Just a recap of how these were put together:

  1. Start with the S&P 500 Index.

  2. Rank every stock by either dividend yield or shareholder yield.

  3. Purchase the 30 highest-ranking companies until each of the S&P 500 sector weightings was full.

The end result should be an apples-to-apples comparison between shareholder yield and dividend yield. There should not be any interference from sector allocation, which often distorts performance numbers.

We want to know whether individual stock selection can be improved by replacing dividend yield with shareholder yield. Thus far, the shareholder yield portfolio has been quite compelling.

Performance Since Inception

First, let’s start off with the dividend yield portfolio. Since inception (May 4th), the portfolio is up just under 7%.

High Dividend Yield’s Top 5 Performers

  • Invesco (IVZ) +36.5%

  • Broadcomm (BR) +23.8%

  • ABBVIE (ABBV) +18.7%

  • The Western Union (WU) +16.6%

  • Seagate Technology (STX) +1.5%

Not bad. Actually, yeah it is pretty bad. The S&P 500 has run circles around this portfolio. But this isn’t about the S&P 500. It’s about dividend yield vs. shareholder yield. So how did shareholder yield do?

Since May 4, 2020, the shareholder yield portfolio has returned 12.6%.

High Shareholder Yield

  • eBay (EBAY) +50.2%

  • Applied Materials (AMAT) +33.3%

  • Apple (AAPL) +32.1%

  • Corning (GLW) +31.4%

  • QUALCOMM (QCOM) +24.2%

Time for Shareholder Yield to Declare Victory? Not Yet…

A 5% outperformance in just over two months is impressive, but certainly nothing to conclude anything from (yet). Let’s let this go at least a year before we start declaring a winner. Nevertheless, it’s an impressive lead. We’ll see if the Shareholder Yield portfolio can continue to do well.

I’ll update you on how these two portfolios are performing in August. There are also a few other portfolio experiments that I’m running. I plan to roll those out on YouTube (and here) over the next few months.

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Thanks again for your interest in my work and your support of my YouTube channel and Substack. If you have any suggestions for content that you’d like to see, I’d love to hear from you!