Companies return cash to shareholders in two ways: through dividend payments or share buybacks. Dividend payments are the percentage of a company’s earnings that it decides to distribute to investors on a quarterly, semi-annual, or annual basis. Or, a company can choose to buy back its own stock. When a company buys back its own stock, it reduces the number of shares outstanding. This helps boost earnings growth since each remaining share captures a greater percentage of the company’s earnings. Higher earnings typically lead to higher share prices over time.
The specific method a company utilizes is determined by many factors, including its profitability, consistency of earnings, and perhaps most importantly, the makeup of its shareholder base. Different investor types tend to have a preference for how excess cash flow is returned. For example, investors who desire supplemental income, such as retirees, often prefer to receive dividends. A dividend is a real cash payment, which the investor can then use to spend however they wish.
On the other hand, growth investors, such as hedge funds, typically favor share repurchases. The downside of dividend payments is that they are taxable income on the shareholder. This results in double taxation, as corporate earnings are taxed once, and dividend payments are taxed again. The relative tax advantage of share repurchases is why growth investors prefer buybacks over dividends.
Differences Between Institutional and Retail Investors
An investor base can comprises the institutional level or the retail, or individual, level. Investors that buy and own stock can either be major institutional investors, such as mutual funds, pension funds, hedge funds or endowments, or individual investors who often buy and hold stock directly. The difference between shareholder bases matters because it can affect a company’s capital return program and whether cash is returned to investors through dividends or share buybacks.
Consider the major tobacco stocks such as Altria Group (MO ), Reynolds American (RAI), and Vector Group (VGR ). Tobacco stocks like these three have high concentrations of individual investors. Altria’s shareholder base is 61% institutions and 39% individuals. That is still fairly low institutional ownership, particularly when compared to other stocks. In the cases of Reynolds American and Vector Group, they are even less popular among institutions. The majority of their shareholders are not institutional; only 48% of Reynolds American’s shareholders, and 45% of Vector Group’s shareholders consist of institutions such as mutual funds.
By contrast, major technology companies like Salesforce.com (CRM) and Alphabet (GOOG), neither of which pays a dividend to shareholders, have a mostly institutional shareholder base. Approximately 88% of Salesforce’s shareholder base consists of institutional investors, while approximately 75% of Alphabet’s shareholder base is institutional.
The tobacco dividend stocks and the technology non-dividend payers have both done extremely well for shareholders over the past several years.
How This Affects Dividends vs. Share Repurchases
Institutions do not favor investing in tobacco stocks. Many, such as pension funds or endowments, have set strict policies forbidding investment in the tobacco industry. This has been done for social purposes; tobacco stocks are commonly referred to as sin stocks. Because a high level of their shareholder base is individuals, many of whom desire dividend income, these stocks pay high dividends to please their shareholders.
Altria maintains a stated dividend payout policy which it adheres to each year. That is, the company aims to distribute 80% of its adjusted earnings per share each year. Similarly, Reynolds American has a stated policy to pay out 75% of its annual earnings. Both companies have achieved reliable earnings growth over a long period of time due to price increases and cost controls. Because of this, Altria has raised its dividend 49 times in the past 46 years and currently has a 3.5% dividend yield. Meanwhile, Reynolds American has paid $12 billion in dividends since 2004. It raised its dividend by 16% in February and the stock now yields 3.3%. Vector Group is a very high-yield dividend stock. Its current annual payout of $1.60 per share each year provides a 7.4% dividend yield. It did not buy back stock last year.
Conversely, these companies spent relatively little on share repurchases in comparison to their dividend payouts. In 2015, Altria spent $554 million on share repurchases and $4.1 billion on dividends. In other words, 88% of Altria’s capital allocation program last year consisted of dividend payments and only 12% was utilized for share buybacks. Moreover, last year Reynolds American spent $124 million on share repurchases but paid $1.5 billion in dividends.
The Bottom Line
As a case study, there is no definitive right answer when it comes to the dividends versus share buybacks debate. It simply depends on what is more important to the investor base. Income investors love dividends, while growth investors will typically side with share buybacks. As long as the target company is growing revenue and earnings from year to year, as these five companies illustrate, shareholders can do very well either way.
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DARS™ (Dividend Advantage Rating System) rates dividend stocks across five distinct criteria: relative strength, overall yield attractiveness, dividend reliability, dividend uptrend, and earnings growth. Dividend.com offers free content available to the general public as well as premium subscription service.
Through the National Electronic Clearing Service (NECS), also called the ECS. By mailing the dividend warrants to the physical address of the investor.
Which are the top dividend yield stocks in India? Some of the highest dividend paying stocks in India are Vedanta Ltd., Hindustan Zinc Ltd, Coal India Ltd, T.V.Today Network Ltd, Bhansali Engineering Polymers Ltd, Balmer Lawrie Investment Ltd, Coal India Ltd.
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
Dividend investing can be advantageous for those seeking steady income, such as retirees, as well as those who wish to take advantage of the compounding effects of reinvested dividends over the long term. But like all investment strategies, it comes with benefits and risks.
With the ability to automatically track dividends and see the impact of dividends on your returns, Sharesight is the best free dividend tracker for self-directed investors. As a comprehensive online portfolio tracking solution, Sharesight also has a range of powerful features that extend beyond dividend tracking.
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
You will be eligible to receive the dividend for stocks you bought before the ex-date. Note that you won't get dividend if you buy the stock on the ex-date, but you will be eligible if you sell them on the ex-date. Dividend will be credited to your primary bank account if you sell the stocks on the ex-date.
Dividends are typically paid on a quarterly basis, though some pay annually, and a small few pay monthly. Companies that pay dividends are usually more stable and established, not those still in the rapid growth phase of their life cycles.
The Company normally pays dividends four times a year, usually April 1, July 1, October 1 and December 15. Shareowners of record can elect to receive their dividend payments electronically or by check in the currency of their choice.
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status.Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
Dividend investing can be advantageous for those seeking steady income, such as retirees, as well as those who wish to take advantage of the compounding effects of reinvested dividends over the long term. But like all investment strategies, it comes with benefits and risks.
Sites like CNBC, Morningstar, The Wall Street Journal, and Investopedia are all great resources available for researching dividend data. For example, on Investopedia's Markets Today page, you can use the stock search tool to enter the company name or ticker symbol that you're researching.
As long as you keep the withdrawal rate at or below 4%, your money should last for decades. To apply the 4% rule, divide your income requirement by 4% to calculate your targeted portfolio size. If $75,000 is your income requirement, for example, you can safely get it from a $1.87 million portfolio.
Introduction: My name is Barbera Armstrong, I am a lovely, delightful, cooperative, funny, enchanting, vivacious, tender person who loves writing and wants to share my knowledge and understanding with you.
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