Over the years, interest in dividend-paying equities and high-yield securities has grown tremendously as investors seek ways to generate meaningful income in today’s near-zero interest rate environment. Mebane Faber, Portfolio Manager at Cambria Investment Management and co-founder of AlphaClone, recently took the time to discuss the new Cambria Shareholder Yield ETF (SYLD), highlighting its unique strategy and approach to the high yield space [see 101 High Yielding ETFs For Every Dividend Investor].
ETF Database (ETFdb): What was the inspiration behind creating the Cambria Shareholder Yield ETF (SYLD)?
Mebane Faber (MF): We have been researching income strategies for a number of years and, being a quant, we let history and data speak for itself. Lots of people get sucked into the booms and bubbles, thinking there is a new paradigm, and then other times there really has been a structural change. One of the biggest structural changes in the U.S. we have seen since the early ’80s is that companies have started to use alternatives means of distributing cash beyond dividends. We actually love dividends–they are a wonderful component of a stock investor’s total return–but because of this structural change in the U.S. market, we think you have to account for all the ways companies actually use their cash flows. This way you come up with a more holistic measure of income to use in selecting stocks.
MF: There are five ways that a company can spend the money they make: they can pay out a cash dividend, buy back their stock, pay down debt, reinvest in the business, and acquire other companies. The last two are investing for growth while the first three are paying cash back to shareholders. There has been a ton of academic research on this process and in our new book, “Shareholder Yield: A Better Approach to Dividend Investing.” We found it’s important to look at all the ways companies return cash, not just through dividends. Once you do that, we think you end up with a better portfolio of equities, which ends up outperforming the traditional dividend portfolios [see The Best Dividend ETF For Every Investment Objective].
Buybacks are one of the main reasons why the holistic shareholder yield has worked, and there is a lot of disinformation regarding buybacks. What many investors don’t understand is if the stock is trading at intrinsic value, buybacks and dividends are pretty much the same thing, except dividends have worse tax treatment. However, if the stock is trading below intrinsic value, and Warren Buffett is a huge proponent of this, there is no better use of cash than to repurchase the stock. This can be seen as a form of value arbitrage. So we put together this portfolio of 100 stocks based on what our measure of shareholder yield is: dividends, net buybacks and debt paid down. We then add factors for liquidity, concentration, trends, momentum and value. We think you end up with a great portfolio of cheap stocks that are returning cash to shareholders with good momentum.
ETFdb: Considering that the Dividend ETF space has become fairly crowded, how does SYLD separate itself from the pack?
MF: If we were to go back in time to the late ‘90s, everyone hated dividend stocks, and they actually traded at a nice discount to the overall market from a valuation standpoint; as money has rushed into dividend paying stocks for the last 12 to 13 years, that valuation discount has evaporated.
One of the things that ends up happening when investing exclusively in high dividend stocks, is you often end up with companies with higher payouts, debt and leverage. This isn’t really what you want, most investors are looking for a more low volatility approach and 2009 demonstrated that pretty clearly. A lot of these high dividend paying stocks ended up being financial institutions and many declined well over 60% in 2008 and 2009. We think dividends and buybacks are great, but you can’t just concentrate on one or the other in isolation [see Monthly Dividend ETFdb Portfolio].
ETFdb: Aside from generating income in the current low-rate environment, what else might investors find appealing about adding SYLD to their portfolios?
MF: The big difference is if you look at the broad based dividend ETFs, they aren’t buying back any stocks, while we look for these companies to be reducing share count by about 5% annually. When combined with dividend yields, this leads to cash returned to shareholders in the high single digits – around 7 to 9% currently. Compare this to the average dividend fund that is yielding about 2-4%. The other important point is you are actually getting a cheaper portfolio; the portfolio trades at a discount compared to many dividend portfolios and the broad markets. This way, investors not only get a cheaper portfolio but much higher yields than what is already out there.
Bottom Line: For those looking for a twist on the dividend space, the Cambria Shareholder Yield ETF (SYLD) is a compelling option. Instead of focusing solely on dividend payments, this fund emphasizes strong free cash flow characteristics, which includes the often overlooked metrics of net share repurchases and net debt paydown.
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Disclosure: No positions at time of writing.