High Yields Are Great – But This Is Even Better

StreetAuthority Network

If you'd invested $100,000 in the S&P 500 back in 1982, it would have been worth $2.3 million by the end of 2011. If you would have invested that same amount in dividend payers, you'd have $4.3 million. 

Not bad. And that's where most investors stop. 

But if you'd invested the same amount of cash using a simple strategy that too many investors often ignore, then it would have been worth $6.7 million.

Seem too good to be true? It's not. 

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Many investors searching for the best total returns will simply look for high-yielding stocks.

But dividends don't tell the whole story -- not even half of it.

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If you're looking for more cash from your investments, you should be looking at all of the ways a company distributes its cash. 

Don't get me wrong -- dividends can be a great indicator of company health. From 1972 through 2011, members of the S&P that don't pay dividends returned just 1.4% per year, turning a $1,000 investment into just $1,710 according to research by Ned Davis.

Meanwhile, companies that pay dividends returned 8.6% annually -- significantly more than those that did not.

Dividends are obviously a key ingredient to success, but they're not the whole story. Investors often overlook two other ways companies can actively return money to shareholders: stock buybacks and debt reduction.

While stock buybacks and debt reduction aren't necessarily as instantly gratifying to an investor, they hold just as much value for any shareholder. That's why understanding these two concepts can give you a leg up.

In fact, it may surprise you to learn that share buybacks can give you much more value than traditional dividends.

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You see, when a company buys back its own stock, it effectively reduces the pool of shares available. And this makes the shares still out there on the market that much more valuable.

Think of it in terms of your share of a company's earnings. If you own 10% of a company that earned $1,000, your share of earnings would be $100. 

But if that company bought back half of its stock, your portion of the earnings would double to $200. 

And that's without you having invested another dime.

And then there's debt repayment.

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Companies that reduce their debt load both make for safer and higher yielding investments.

Debt reduction means a company has its act together. It's generating enough cash flow that it doesn't need to depend on others to expand. And the less you owe... the lower your interest expenses. This frees up more capital for other uses... like increasing dividends and buying back shares.

Put simply, the less money a company is obligated to pay creditors, the more it has to line your pockets.

When factored in together, dividends, share buybacks and debt reduction provide a more comprehensive view of the ways companies return money to shareholders. 

We like to think of this as a "Total Yield." And simply put, we think every investor should be looking at stocks this way. If history is any guide, you should outperform any and all "dividend-only" strategies over time by using "Total Yield."

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