July 26, 2013

Brian and Bo tackle the challenge of explaining how yield can affect the overall performance of a portfolio. They share historical numbers and some great quotes that reference the importance of making solid investments that keep dividend yield in mind.

This week’s show is based on a book the guys read on vacation: Shareholder Yield- A Better Approach to Dividend Investing  By: Mebane Faber.   We put together a summary that highlights the key statistics from the book.  These points help illustrate the relationship between dividend yield and portfolio return.

  • Dividends and their reinvestment contribute a major portion of the stock market return.  From 1871-2011 stocks had an annualized return of 8.83%.  If you exclude dividends being reinvested that number drops to 4.13%. For example:
    • A $100 investment made in 1871 would have grown to around $29,000 by the end of 2011.
    • By reinvesting the dividend on that same $100 investment, that $29k turns into a whopping $13,955,952.
    • Dartmouth professor Kenneth French ranked U.S. stock returns from 1927-2010 based on dividend yield:
      • High yield: 11.2%
      • Low yield: 9.1%
      • No yield: 8.4%
  • Investing in the highest yielding dividend stocks outperforms the S&P 500 by over 2% a year from 1982-2011.

A word of caution now that you know how important yield is to your portfolio. Most companies in the S&P 500 have a positive net payout yield.  That’s not to say the shareholder will receive a portion if any of that payout. There are companies that are trying to dilute shareholders, and these companies are not always easy to spot. Half of the 95 companies with a negative payout yield actually had positive dividends (12 with a yield over 3%).

  • Taking those precautions into consideration, investors should look into all the ways that companies can return cash to shareholders. Here is a simple formula to follow:
    • Shareholder yield = dividend yield + net buyback yield + net debt pay down yield
    • Due to tax treatment, as well as structural changes in the 80’s, U.S. companies have started to put the brakes on dividend payouts and started to add more stock buy backs.
      • Pre- 1982 it was considered stock manipulation for a company to buy back shares of its own stock.
      • Post- 1982 stock buy backs have become more common than dividends, as a way for companies to essentially reinvest in themselves.
      • Warren Buffet cited the importance and incentive of buy backs in his 1984 quote, “When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” It comes as no surprise that when Berkshire Hathaway announced their first buyback program in 2011 they said the “repurchase program is expected to continue indefinitely.”
  • Hypothetical example:
    • Maximizing shareholder yield (dividend yield, net buyback yield, and net debt pay down yield) results in substantial increase in absolute returns. The simple shareholder yield portfolio outperformed the S&P 500 by over four percentage points a year. While a $100,000 portfolio invested in the S&P 500 in 1982 would have grown to $2.3 million by the end of 2011, the shareholder yield portfolio would have been worth $6.7 million.



Most Recent Episodes

How to Recover From 4 HORRIBLE Financial Mistakes!

In our nearly four decades of combined experience managing money, we’ve seen some horrible financial mistakes - here are the four worst we’ve seen first-hand and what you can do to avoid making a similar mistake. In this episode, you’ll learn: The worst financial...

Why Americans Are Actually Broke! (2023 Edition)

Americans might be bad with money, but you don’t have to be. In this episode, we discuss the underlying reason why Americans are so bad with money and how you can do it better. In this episode, you’ll learn: Common financial pitfalls you should avoid Practical steps...

Build Wealth With the 3 Bucket Strategy! (By Age) 2023 Edition

We believe there are three distinct taxable buckets you have the option of investing in for retirement. We’ll talk about how to balance those buckets by age and show a case study by age that shows what your buckets may look like! In this episode, you’ll learn: The...

Debt Ceiling Crisis: World’s Financial System at Risk?

Should you be worried about the debt ceiling crisis? Although political leaders have so far been unable to come to an agreement, we'll tell you what history says will happen and what it means for your finances. For more information, check out our free resources...

Financial Advisors React to INSANE Money Advice on TikTok!

Is financial advice on TikTok all bad or is there some good advice out there? Check out our brand new TikTok react show where Brian and Bo give their honest reactions to trending financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO)...

How to Save Thousands of Dollars in Taxes in 2024

Tax season is over for most of us, but that doesn’t mean it’s time to stop thinking about your taxes! Planning out your tax strategy in advance can save you time and money on your taxes. In this Q&A, we’ll discuss the line items on your return to pay attention to...

Average 401(k) Balance by Age (2023 Edition)

Are you doing better than the average American at saving in your 401(k)? We'll talk about basics of a 401(k), including new limits, employer matches, and vesting schedules, how many millionaires are created by 401(k)s, and of course the average 401(k) balance by age....

TikTok Products That Are Actually Worth the Money!

TikTok has become not only a popular social media platform, but a popular place to find trending new products. Are any of them actually worth it? Let’s find out!   For more information on how to make the most out of your financial life, check out our free...

The Dark Side of Being an American Millionaire! (2023 Edition)

Being a millionaire isn't always sunshine and rainbows in 2023. In this episode, we'll discuss some common pitfalls and traps millionaires fall into, shock-and-awe stats, and how you can handle your money even better than a millionaire. In this episode, you’ll learn:...