Yield! Watch for Dividends

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

Financial Hacks and Habits of the Top 1% (By Age)

ho wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% - and the habits and hacks those in the top 1% used to get there.   In this...

How to Win With Money in 2023!

Financial resolutions are always near the top of the list of Americans’ most popular New Year’s resolutions. Whether you want to save and invest more, pay off debt, or have other financial goals, we will give you the tools you need to win with money in 2023.   In this...

TikToks That INFURIATE Financial Advisors

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

5 Levels of Wealth AND How to Achieve Them! (2023 Edition)

We believe there are five distinct levels of wealth, but they aren’t solely dependent on income or net worth. We’ll walk you through each of the five levels - including how to know where you are at, how to advance to the next level, and signs you are doing it right.  ...

Average Net Worth By Age in 2023!

It’s time for one of our most anticipated shows of the year: our annual Net Worth By Age show! In this year’s edition, we’ll shared updated numbers and data for 2023 and discuss the most important things for you to focus on in each decade.   In this episode, you'll...

Win Financially During a Recession! (Everything You Need to Know)

The bear market we've experienced in 2022 has been longer than many in recent memory - and some are concerned that the economy may soon enter into a recession. Here's everything you need to know to stay on-track and win financially during a recession!   In this...

The Fed Just BROKE the Car Market! (What You Need to Know)

Car prices have been on a rollercoaster ride the last few years, and it looks like they might finally be coming down. In this episode, we’ll discuss what you need to know about the current car market, pitfalls of buying a car, and how to do it the right way.   In this...

Top 4 Money Mistakes People Make During the Holidays!

There’s a reason why financial resolutions are always near the top of the list in January - many Americans spend the holiday season making financial mistakes. In this episode, we’ll discuss the top money mistakes people make during the holidays and how to avoid them....

Financial Advisors Share What They WISH They Knew About Money Earlier!

Have you ever felt like if you just knew this one thing about money earlier your finances would be in a better spot? In this episode, we’ll share the five biggest things we wish we knew about money earlier!   In this episode, you'll learn: What we wish we knew earlier...