In this age of online brokerage accounts and high frequency trading, dividend-paying companies are often seen as tame and predictable. However, astute analysts have long focused on dividend paying stocks, and for good reason. Stocks of companies paying high cash dividends have outperformed broad stock market indices in both the United States and in foreign equity markets for as long as returns have been calculated. Likewise, the reinvestment of dividends contributes significantly to a portfolio’s total return.
However, due to legal, tax, and structural changes in the US markets, dividend payments have become a less prominent method by which companies return cash to shareholders. Dividend payments are only one use of a company’s free cash flow; other uses of cash include: share repurchases, debt paydown, reinvestment in the business, and mergers and acquisitions. Consequently, investors in the 21st century must look to all of the direct and indirect ways in which companies distribute their cash to shareholders, a metric commonly referred to as “Shareholder Yield”. In this book, we analyze portfolios based on the various cash flow metrics and find that portfolios of companies with high shareholder yields outperform both broad market indices and high dividend yield portfolios by a substantial margin.
With all of the uncertainty in the markets today, Shareholder Yield helps the reader answer one of the most often asked question in investing today – “Where do I find yield”?