Understanding High Dividends and the Importance of Yield
When we encounter a stock with a high dividend yield, it often sparks our curiosity. An initial impulse might lead you to calculate potential returns from a sizable investment. What if you put $10,000 into a stock boasting a 9.3% yield? A tempting thought!
However, prudent investors know that it’s essential to dig deeper beyond surface-level statistics. Contrary to popular belief, an expansive yield does not always indicate good health; sometimes, it may signal underlying issues, such as a declining share price.
Take Verizon Communications (NYSE: VZ), for example. With a yield around 6.5%, many investors might assume that they are enjoying escalating dividends. Although Verizon has managed marginal yearly increases, these adjustments are typically just a penny per share.
During the past five years, Verizon’s dividends have increased by only 10%, which falls significantly short when compared to inflation rates. This lack of real growth has impacted investor sentiment, causing the stock's value to drop by 31% during the same timeframe.
Even when factoring in dividends, the total return for Verizon still lags, down about 9% in a period when the S&P 500 achieved a return of 108%!
Why Looking Beyond Yield is Essential
This raises an important message: don’t be fooled by a shiny, high yield. To mitigate its risks, we must utilize reliable methods to evaluate a stock effectively. I’ll introduce you to an essential metric that provides valuable insights into shareholder rewards—shareholder yield.
Understanding Shareholder Yield
A dividend stock can reward us in three crucial ways:
- Current Dividends: The actual dividends distributed to shareholders after purchase.
- Dividend Growth: Increases the yield on original investments while supporting share prices.
- Share Buybacks: Reduce outstanding shares, thereby enhancing earnings per share.
It is the combination of these three aspects that paints a more comprehensive picture. Often viewed negatively, buybacks can significantly improve returns when executed at opportune times.
This is where shareholder yield shines, as it encompasses both buybacks and dividends, giving investors a clearer view of how well a company is rewarding its shareholders.
Spotlight on a High Shareholder Yield
For an illustrative case, let’s consider Lockheed Martin (NYSE: LMT), renowned for its military technology advancements such as the F-35 joint-strike fighter.
Despite a mere 2.3% current dividend yield that might deter traditional dividend investors, Lockheed’s history of remarkable payout growth—38% in the past five years—is transformational. This growth has undeniably impacted its stock price positively.
Evaluating Lockheed's Performance
In the last five years, LMT’s stock price has outpaced its dividend growth significantly. Moreover, many shareholders from five years ago are now enjoying a yield of 3.5% on their original investments, an impressive upgrade compared to the current yield.
Next, let’s take a look at Lockheed’s recent buyback program, which has effectively decreased the number of shares by 16%. This reduction has notably improved various per-share financial metrics. Remarkably, the share price surged beginning in 2022 as buyback activities intensified.
Calculating Shareholder Yield
To derive shareholder yield, you should sum the company's expenditures on share repurchases over the past year, subtract any cash raised through share issuances, and then add the total dividends paid. This total is then divided by the market cap.
Specifically for Lockheed, they invested $3.05 billion in dividends and $5.7 billion in buybacks, culminating in $8.75 billion in returns over the last year. With a market cap of $132.9 billion, Lockheed holds a shareholder yield of 6.6%, which is nearly triple its 2.3% current dividend yield.
Identifying Other Opportunities
Shifting attention to other promising stocks could serve investors well. With the oil markets fluctuating, refiners represent a unique opportunity, especially given their high shareholder yields. An exemplary choice is Valero Energy (NYSE: VLO), known for its robust refining capabilities.
Valero currently boasts a 3.2% dividend yield, but a deeper look shows an exceptional shareholder yield at 14.6%. In the past year, they have paid $1.4 billion in dividends and executed $4.8 billion in buybacks, signifying a strong commitment to shareholder value.
Navigating Economic Challenges with Resilience
In light of ongoing economic uncertainties and geopolitical factors, maintaining a focus on reputable dividend stocks, augmented with growth potential, is wise. Many investors find comfort in knowing they possess recession-resistant dividend stocks that promise considerable returns, allowing them to ride out turbulent periods.
In conclusion, better understanding and actively seeking out high shareholder yield stocks can offer substantial protection and growth for investment portfolios, providing a sound strategy for weathering economic fluctuations.
Frequently Asked Questions
What is shareholder yield?
Shareholder yield combines dividends and share buybacks to gauge how much a company returns to its shareholders.
Why is shareholder yield important?
It gives a broader view of financial health compared to just looking at dividends, factoring in share price improvements through buybacks.
How can I calculate shareholder yield?
Sum the company's buybacks and dividends for the last year, subtract any cash from share issuances, and then divide by the market cap.
Why should investors look beyond high dividend yields?
High yields can often result from falling share prices. A balanced approach including yield growth is crucial for maximizing returns.
What are some stocks with high shareholder yields?
Lockheed Martin and Valero Energy are two notable examples of companies with significant shareholder yields, providing added value to investors.
