Net Payout Yield – The Better Dividend Strategy?
When investors buy shares of a company, they become its co-owners and are thus entitled to receive part of the firm’s (future) profits. Dividends immediately come to mind as a means to pay out cash to investors. But dividends are not the only tool to do so.
Buybacks (also called share repurchases) represent another way for company managers to redistribute company earnings back into the shareholders’ pockets. In this context, it makes sense to consider buybacks net of share issuances. As we show in the paper, (net) buybacks have been used extensively in the developed markets.
Net Payout Yield (also known as total shareholder yield) takes both dividends and net buybacks into account – it is the more complete measure to quantify the total amount given back to shareholders.
Portraying net payout investing as an alternative to dividend investing, we build and compare different variations of both strategies, over three regions (developed markets, United Sates, and Eurozone). Our findings are consistent across all versions and regions over a back-tested period from 2007 to 2020: a selection of companies with high net payout yields (NPYs) would have outperformed a portfolio of high dividend yielding (DY) stocks.
Below is a summary of results in the developed markets over a back-tested timeframe from May 2007 to September 2020 (our findings go in the same direction in the US and in the Eurozone):
- In its purest form, the NPY portfolio outclassed its DY counterpart in terms of annualized mean return (5.05% vs. 2.22%), and volatility (18.62% vs. 19.38%).
- Building on the pure version, the addition of income and payout stability filters enhances performance (5.68% for NPY vs. 3.32% for DY) and lowers volatility (17.09% for NPY vs. 17.03% for DY).
- Since central banks now discuss a ban/cut on buybacks and dividends for financials due to the COVID-19 crisis, we also look at a version of the strategy that excludes financials. This version shows further improved and return figures.
- Furthermore, selecting only stocks that display high dividend or net payout yields often leads to a deviation from the market sector allocation. Thus, we build sector neutral versions of both strategies, which also outperform their ‘plain vanilla’ versions.