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Investing 101: 3 picks with high shareholder yield

Pras Subramanian

You've heard of bond yields and dividend yields, but have you heard of shareholder yield? In this installment of Investing 101, legendary market strategist Jim O’Shaughnessy of O’Shaughnessy Asset Management reveals what the concept is, and why it’s crucially important for investors.

Shareholder yield is a stock’s dividend yield plus its buyback yield, O’Shaughnessy says in the attached video. Looking at historical returns, it’s obvious why investors need to pay attention here. O’Shaughnessy’s research shows that between January 1, 1927 and November 30th, 2013 the inflation-adjusted return of $10,000 invested in the top decile from his All Stocks Universe (a stock screener used by OSAM) grew to $33 million, a real average annual return of 9.77%. The top decile was compromised of the stocks with the highest shareholder yield.

The same $10,000 invested in the OSAM’s All Stocks Universe grew to $5.5 million, a real average annual return of 7.52%. Now, if one were to invest that same $10,000 in the worst decile by shareholder yield, it grew by a paltry $161,000, a “pathetic” return of 3.25% real a year, O’Shaughnessy says. Basically, investors who buy companies that issue a lot of stock has historically been a terrible trade.

However, not all stocks with high shareholder yield are created equal. O’Shaughnessy notes the spread between cheap stocks with high shareholder yield and expensive stocks with high shareholder yield is 10.2% annualized, a whopping difference.

With that said, here are three, cheap stocks with high shareholder yield that O’Shaugnessy is recommending now.

CF Industries (CF):

“CF Industries is a cheap large company with good financial strength that has a high shareholder yield, that’s very important,” he says.

Marathon Petroleum (MPC):

Marathon is a “financially strong large company with value characteristics that put it in the lower half of the valuation, all across the spectrum,” Shaughnessy contends.

Northrop Grumman (NOC):

Similar to the other picks, (NOC) has the right financials, is cheap, and of course offers the high shareholder yield that O’Shaughnessy craves in his investments.

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