Growing Dividends, Stock Buybacks Helping Investors Beat Market Gyrations
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields.
While many investors were negative regarding stocks in 2009 and 2010, this was a great buying opportunity; and I would rather have the corporations I’ve invested in buy back their shares at those attractive valuations. At current levels, paying a solid dividend yield makes more sense, as share prices are quite elevated and the comparison to U.S. Treasury bonds is quite appealing.
According to the Federal Reserve, excluding financial companies, U.S. corporations had $1.79 trillion in cash and cash equivalents during the fourth quarter of 2012. (Source: Ibid.)
Clearly, American corporations are lean organizations in outstanding financial shape and flush with cash.
At this point, it is difficult to allocate new capital when the market is at such high levels. I look at long-term investing in terms of creating a portfolio that will last for many years. What I would do at this point is look for companies that will continue to increase their dividend yields and wait for a pullback in the market.
No one can time the market exactly, but what we can do is have a list of companies we want to purchase. Then, when prices become attractive for long-term investing purposes, I would look to accumulate over a period of time.
If you look for companies that will increase their dividend yield over the past 10 years and accumulate these firms on significant pullbacks, your returns should be very substantial.
With the stock market at such high levels, I would certainly wait for a significant pullback before accumulating new stocks. However, I am putting together a shopping list of companies that issue a solid dividend yield and will continue increasing their dividend yield over the next decade, so that I can watch for pullbacks in these stocks.
Long-term investing is about allocating capital at the right time. When looking back over the last 10 years and accumulating on significant pullbacks, yes, the crash in 2008 was severe; however, if one maintains a policy of buying good companies that pay a strong dividend yield on sell-offs, the returns to date would be extremely profitable.