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Buyback, Dividend ETFs Boosted as Companies Return Record Cash


With the Dow Jones Industrial Average at an all-time high, Corporate America is in better shape than the average American after the financial crisis. Companies are seeing profits rise and firms are returning cash to investors at a record pace, which has provided a lift to ETFs that specialize on dividends and share buybacks.

S&P 500 companies are projected to pay out at least $300 billion in dividends over 2013, compared to the $282 billion dished out last year, fueling the market rally that has pushed the Dow and the S&P 500 to records, the Wall Street Journal reports.

Some of the largest dividend ETFs include:

  • Vanguard Dividend Appreciation ETF (VIG) : 2.21% 12-month yield
  • iShares Dow Jones Select Dividend Index Fund (DVY) : 3.47% 12-month yield
  • SPDR S&P Dividend ETF (SDY) : 3.02% 12-month yield

Meanwhile, U.S. companies also plan to buy back $117.8 billion in their own shares in February, the largest monthly total on record dating back to 1985.

Buybacks help boost a company’s earnings-per-share ratio through reducing shares outstanding.

Investors can take a look at the PowerShares Buyback Achievers Portfolio (PKW) , which has garnered an impressive five-year annualized return of 8.5%, compared to the S&P 500 at 4.8%. The TrimTabs Float Shrink ETF (TTFS) is an actively managed fund that focuses on companies that lower the number of shares outstanding. [Buyback ETF’s Five-Year Return Creaming the S&P 500]

Additionally, after 17 of 18 largest banks passed the Fed’s “stress tests,” several banks are also moving to boost dividends and share buybacks. [Dividend and Buyback ETFs: A Match Made in Heaven?]

“We are starting to get out of hunker-down mode, so what you have now is a bunch of cash-hoarders who have decided to take that cash out of their balance sheets,” David Ikenberry, dean of the University of Colorado’s business school, said in the WSJ article. “Is that a good thing? It probably is. They’re liberating capital and putting it back out into the capital markets, and letting that multiplier effect kick in.”

Companies have been hoarding money over the past few years as they cut costs or take advantage of the historically low interest rates to borrow and refinance. According to the Federal Reserve, corporations, excluding financial companies, held $1.79 trillion in cash as of the fourth quarter of 2012, compared to $1.77 trillion in the third quarter.

“Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” Rob Leiphart, an analyst at Birinyi, said in the article. “Companies have to do something with it.”

For more information on dividends, visit our dividend ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.