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These are good days for value investors and dividend seekers – two concepts that are often joined at the hip.
In fact, dividends are growing again and doing so an admirable rate. Add it all up and advisors have a lot to work with when it comes to encouraging clients chastened by value's struggles over the prior decade and income investors looking for elevated levels of quality.
Advisors also have an opportunity to parlay the resurgent value factor into another income-related topic: Shareholder yield. This isn't an advanced concept, but it's one either overlooked by clients or something they don't know about at all. It's a combination of buybacks, dividends and a company's debt reduction efforts. In fact, shareholder yield is often viewed by professional as a metric superior to pure dividend yield.
“A higher shareholder yield is always desirable, as it indicates that the company is returning value to shareholders through a combination of cash dividends, share repurchases, or debt paydown,” according to the Corporate Finance Institute. All three methods are ways that a company can distribute cash to shareholders. With the growing number of share buybacks replacing cash dividends as the method of returning cash to shareholders, shareholder yield is powerful in that it incorporates both share repurchases and cash dividends in its calculation. Therefore, it is a popular alternative to the dividend yield.”
Value Applications
On a standalone basis, shareholder yield is an attractive proposition and one that's attractive for a broad swath of clients. At a time when value is back in style, the potency of shareholder is increasing, particularly in strategies that combine the two concepts.
“Every value factor has performed well since September 2020, but price-to-book and shareholder yield are the leaders of the value factor pack,” notes WisdomTree. “The least expensive quintiles of the Russell 1000 Index, as measured by price-to-book and shareholder yield, have returned 42.8% and 38.2% respectively.”
Another selling point for advisors is the track record of shareholder yield – one that's sure to be appealing to clients with long-term time horizons and those looking to reduce risk.
“Despite these recent value factor trends, it would be remiss to neglect the past. In the last 10 years, shareholder yield was the only value factor that 'worked' – meaning it was the only effective way to screen the Russell 1000 Index for the least expensive stocks and outperform not only the expensive stocks, but also the benchmark index itself,” adds WisdomTree.
History also proves there are good reasons to embrace value companies prioritizing shareholder rewards. Those include imposition of discipline, indications that shares are undervalued (often signaled via buybacks) and the notion that management teams that are holding on to cash may be too optimistic about growth prospects – a particularly relevant concern in slow growth sectors.
Putting It Into Practice
Advisors looking to deploy specific shareholder yield strategies in clients portfolios have several options from the universe of exchange traded funds, including the WisdomTree Quality Shareholder Yield Fund (QSY).
From late 2017 through the end of the first quarter, QSY handily topped the Russell 1000 Value Index and the broader domestic large-cap value category.
“QSY is a quantitative active strategy that combines a methodical approach to ranking stocks on their shareholder yield and quality scores, with the added ability to apply discretion where risks or opportunities to the quantitative model arise,” according to WisdomTree.
A more direct way of conveying that clients is that they'll get the three benefits of shareholder with higher quality. That's a winning concept.
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