There’s no denying many investors love equity income. And there’s no refuting that, over the long term, dividends — particularly when reinvested — can represent a significant portion of a portfolio’s total returns. Those facts shouldn’t be ignored.
However, dividends aren’t perfect. Relative to other forms of shareholder rewards — namely, repurchase programs — dividends are inefficient when it comes to taxes. Investors, not companies, pay the taxes on dividends. But shareholders are not subjected to taxes when a company buys back its own stock. That doesn’t mean dividends should be avoided. But it does imply there’s a strong case for shareholder yield.
Shareholder yield, which is the combination of buybacks, debt reduction, and dividends, is accessible in umbrella form thanks to ETFs like the WisdomTree U.S. Value Fund (WTV ). Yes, WTV is a value fund, but it emphasizes shareholder yield over inexpensive stocks. The difference is material. For the year ending Feb. 13, WTV has gained 25.73%. That’s an advantage of more than 700 basis points over the Russell 1000 Value Index.
WTV: Convenient Option for Shareholder Yield
As WTV’s performance over the past year confirms shareholder yield can be a better bet than value alone. The ETF offers other advantages, including active management and removal of the stock-picking burden. After all, many advisors and retail investors don’t have the time to scour the U.S. equity landscape for companies that check all three shareholder yield boxes. Of course, the returns are hard to ignore as well.
In a recent report, Morningstar analyst Larry Swedroe cited work on shareholder yield by Chris Satterthwaite of Verdad. One of the big takeaways from Satterthwaite’s research is that U.S. companies that had buyback yields also notched impressive returns. But those with high dividend didn’t necessarily deliver outsized performance. However, Satterthwaite did make a case for the combination of buybacks and dividends.
“Satterthwaite demonstrated that combining both dividend yield and net repurchase yield into total shareholder yield is a far stronger metric than the dividend yield only—it does a relatively good job of spreading returns in a linear fashion, both in the US and abroad,” noted Swedroe.
That’s good news, but WTV’s implementation of the quality factor could be additive to long-term. That’s because its implication is that member firms are not feasting on debt to support shareholder rewards. Bottom line: Investors can have their cake and eat it too with WTV.
Dividends Just a Return of Investor Capital
“The main takeaway is that there is nothing special about dividends, except that they are a tax-inefficient way to return capital to shareholders, and they are certainly not income (except from a tax perspective); they are just a return of investor capital—by definition, income increases wealth while dividends do not,” added Swedroe.
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