Shareholder Yield: Why “Buybacks” Are Superior to Dividends
Shareholder Yield: Why “Buybacks” Are Superior to Dividends
๐ WHO THIS IS FOR
- Target Profile: High-Net-Worth Investors in top tax brackets (37% Federal + State).
- Primary Objective: Tax-Efficient Total Return (Capturing corporate cash flow without triggering taxable dividends).
- Not Suitable For: Income-focused retirees who need immediate cash flow to pay bills and pay $0 taxes (low bracket).
EXECUTIVE SUMMARY
- The Metric: Standard “Yield” only counts Dividends. Shareholder Yield counts Dividends + Stock Buybacks + Debt Paydown. It measures the total cash a company returns to owners.
- The Tax Arbitrage: Dividends are “Forced Distributions.” You pay tax even if you don’t need the money. Buybacks are “Optional Distributions.” The company uses cash to reduce share count, driving up the price of your shares. You pay $0 tax until you choose to sell.
- The Alpha: Companies with high Shareholder Yield (massive buybacks) historically outperform high Dividend Yield companies because they are often more disciplined with capital allocation.
- Authority Baseline: Meb Faber’s research (2013) demonstrated that a portfolio of high Shareholder Yield stocks beat the S&P 500 by ~2-3% annually over decades.
Dividends are like receiving a check in the mail that the IRS opens first. Buybacks are like the company putting money directly into your savings account without the IRS knowing. For the wealthy investor, Shareholder Yield is the smarter way to harvest corporate profits. It respects your tax bracket. According to Team BMT Analysis, shifting focus from “Dividend Aristocrats” to “Buyback Kings” is the simplest way to improve after-tax returns. Source: Cambria Investment Management / YCharts
Scenario: Company A and Company B both have $100M profit to return to shareholders.
- Company A (Dividends): Pays $100M in cash dividends.
Shareholder: Receives cash. Pays 23.8% tax. Reinvests remaining 76.2%.
Efficiency: Low (Tax Drag). - Company B (Buybacks): Uses $100M to buy its own shares on the open market.
Mechanic: Share count drops by 5%. Earnings Per Share (EPS) rises by 5%. Stock price rises.
Shareholder: Receives $0 cash. Pays $0 tax. Owns a larger slice of the pie.
Efficiency: High (Tax Deferral).
BMT Verdict: Buybacks are mathematically identical to tax-free reinvested dividends. If you are reinvesting your dividends anyway (DRIP), you are essentially mimicking a buyback but voluntarily paying taxes to do it. Stop it. Prefer companies that do the reinvesting for you internally.
Performance Comparison (1982-2015)
| Strategy | Annualized Return (%) |
|---|---|
| S&P 500 (Market) | 11.0 |
| High Dividend Yield | 13.0 |
| High Shareholder Yield | 15.1 |
*Chart Note: The Shareholder Yield strategy outperforms because it screens for “Value” (low valuation) and “Quality” (cash generation). It avoids “Yield Traps” (companies paying high dividends from debt) by including debt paydown in the metric.
Regulatory Impact: The Inflation Reduction Act of 2022 introduced a 1% Excise Tax on stock buybacks. While politicians framed this as a penalty, Wall Street shrugged. A 1% corporate tax is still vastly cheaper than the 20-37% personal tax rate on dividends. The structural advantage of buybacks remains intact.
โ BOUNDARY CLAUSE: This Structure Breaks Down If:
- Valuation is Extreme: If a company buys back its own stock at a P/E of 50 (overvalued), it destroys shareholder value. Buybacks are only good when the stock is cheap or fairly priced.
- Debt-Funded Buybacks: If a company borrows money to buy back stock (leveraging up), it increases bankruptcy risk. The Shareholder Yield metric protects against this by including “Net Debt Paydown” as a positive factor.
Execution Protocol
Look for the “Net Payout Yield” (Dividends + Buybacks). Examples (Historical): Apple (massive buybacks), AutoZone (zero dividend, 100% buyback), Travelers.
SYLD (Cambria Shareholder Yield ETF): The flagship fund implementing this strategy. It targets the top 100 US companies based on cash flow return. FYLD (Foreign): International version. QSY (WisdomTree): Another quality-screened buyback fund.
Swap your generic Large Cap Value ETF (VTV) for a Shareholder Yield ETF. You get similar “Value” exposure but with a higher quality screen and better tax efficiency.
Income is not wealth. Wealth is wealth. By focusing on Total Yield rather than just Cash Yield, you align your portfolio with the most powerful force in finance: Compounding without tax friction.
WEALTH STRATEGY DIRECTIVE
- Do This: Check the “Share Count” trend of your holdings. A declining share count over 5 years is a bullish signal of a “Cannibal” company (eating itself to enrich remaining owners).
- Avoid This: Ignoring buybacks because they feel “artificial.” In a fiat world, reducing the denominator (shares) is the most reliable way to increase the numerator (price).
Frequently Asked Questions
Are buybacks manipulation?
Critics say yes; math says no. It is simply a capital allocation decision. If the company has no better use for cash (no high-ROI projects), returning it to shareholders via buybacks is the responsible thing to do.
Do I get any cash?
Not directly from the buyback. You create your own cash flow by selling the appreciated shares when you decide. This puts the control in your hands, not the Board of Directors.
What about debt paydown?
Paying down debt increases the equity value of the enterprise. It is a form of yield. The Shareholder Yield metric rewards companies that deleverage, making the portfolio safer in a recession.