High Shareholder Yield Stocks

Shareholder yield goes beyond dividend yield and captures all the different ways a company can return cash to shareholders.

Returning Cash to Shareholders

For most investors, when they hear the word “yield,” they immediately think of dividend yield. Dividends are important to many investors and contribute to the total return an investor receives when buying a stock. However, dividends are only one way a company can return cash to its shareholders.

In addition to paying dividends, a firm can use its cash to buy back its stock. When a firm buys back its stock, it is using cash on its balance sheet to lower its shares outstanding in the market. As a result of retiring some of its stock, the remaining shares in the market are entitled to more of the company’s profit on a per share basis. This is a positive for investors since investors are owners of the company and they are now entitled to a higher level of earnings per share than they were before the buyback occurred.

Companies can also use cash to pay down its debt, reducing interest payments and lowering default risk. If interest payments decline over time, it should contribute positively to earnings and cashflow, which are considered important in the generation of shareholder value.

Shareholder yield is a metric that looks at all the different ways companies can return capital to their shareholders. The measure, which emerged in the mid-2000s, is seen as an important, more wholistic measure of how companies are returning cash to shareholders as more companies buy back their stock.

Let’s look at shareholder yield in more detail and discuss some of the important considerations to keep in mind when using this type of “yield” measurement in your stock selection process.

Going Beyond Dividend Yield with Shareholder Yield

To calculate shareholder yield, we take the dividend yield and add that to the buyback yield and debt paydown yield.

To calculate the dividend yield, we take the stock’s annual dividend per share and divide that by the stock’s price per share.

To calculate the buyback yield, we determine the percentage decrease (or increase) in shares outstanding. If a company’s shares outstanding are declining, that would mean its buyback yield is increasing.

To calculate debt paydown yield, we calculate the percentage decrease (or increase) in debt relative to market capitalization.

Shareholder Yield = Dividend Yield + Buyback Yield + Debt Paydown Yield

Let’s look at the following hypothetical example. In the table below, Company A pays a dividend yield of 2% and Company B yields 5%. If all one cared about was dividends, Company B looks more attractive. But when we include buyback yield and debt paydown yield to calculate shareholder yield, Company A looks more attractive with an 11% shareholder yield vs. 7% for Company B.

Long-term tests show that high shareholder yield stocks outperform the broader stock market and high dividend paying stocks.

Investing Considerations Using Shareholder Yield

There are two important considerations for investors to think about when utilizing shareholder yield. The first is that not all buybacks are created equal. Some companies are good at timing the buyback of their stock at discounted valuations, while some companies are not-so-good at buying their stock, repurchasing shares when the stock is overpriced. This has very important implications because if a company buys back its stock when it is overvalued, that isn’t a productive use of the firm’s capital. Compared to dividends, buybacks are considered superior from a tax standpoint because dividends are taxed after they are paid whereas stock buybacks are not.

The second point is like many investment metrics, shareholder yield can be combined with other factors to help uncover quality stocks. For example, combining the metrics, shareholder yield and cheapness (or value), is one way to increase potential returns. Another approach may be to supplement shareholder yield with momentum or quality factors. This would produce a strategy focused on high shareholder yield stocks that exhibit price strength or high-quality characteristics.

In Search of The Highest Shareholder Yield Stocks

Sourcing stocks with high shareholder yield presents investors with a good starting point for stock selection and analysis that goes beyond dividends and rewards companies that are buying back their stock and paying down debt – two other value-added uses of cash that have the potential to increase shareholder value.

Calculating Shareholder Yield on your own or even finding a list of the highest shareholder yield stocks in the market isn’t that straight-forward or easy to find, which is why we make the list of the top shareholder yield stocks in the market available on Nasdaq.

See the Top Scoring Shareholder Yield Stocks in Today’s Market

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