In this week's Barron's magazine, the cover article, Still Too Stingy, highlighted the fact corporations are more focused on stock buybacks than dividend payments. The buyback focus may actually be to the detriment of a company's stock performance.
Just look at some of the strongest sectors of the stock market in the past two years: electric utilities, real-estate investment trusts, cigarette makers, telecommunications providers and energy-oriented master limited partnerships. All of them pay nice dividends.
Additionally, as noted in prior posts, baby boomers appear to be focusing equity purchases on those companies that pay and grow their dividend.
"A lot of corporations are missing the seismic shift in retail demand for yield," says Henry McVey, chief investment strategist at Morgan Stanley. As tens of millions of baby boomers start retirement, the demand for yield-oriented investments will climb. McVey notes that Americans over 65 have equity portfolios with an average yield of 2.6%, versus 0.8% for those under 65.
Investors should keep in mind that dividends are an important aspect of overall stocks returns.
The waning importance of dividends in the States reflects the rise in the past two decades of institutional investors, who tend to see stocks as vehicles for capital gains, not income. Historically, however, dividends have been crucial to investors. Since 1928, stocks have returned 10.4% annually, with 40% of that generated by dividends.
The article notes company's prefer buybacks to increasing the company dividend because buybacks are not a long term commitment, where dividends are. As an investor, company's that can make a long term commitment to a higher and growing dividend are those that likely will see stronger stock price returns in the long run.
Following is a link to a few related posts on this site discussing the buyback versus dividend growth conundrum.
Still Too Stingy ($)
By: Andrew Bary
May 21, 2007