The 'ultimate' objective of any corporation is to create value
for its stakeholders. In fact, one factor common among companies
that turn out to be 'great' long-term investments is their focus
on enhancing 'shareholder value'. (Read:
High Quality ETFs for long-term
Most investors focus on dividends while looking for value
enhancing investments but by focusing on dividends alone,
investors miss the bigger picture. Corporate actions such as
buying back shares and repaying debt also create value for
Companies that consistently generate strong cash flows can be
relied upon as excellent long-term investments since they can
utilize that cash to pursue investment opportunities that enhance
shareholder value or return cash to shareholders.
Many U.S. companies have accumulated huge cash piles in recent
years. They are likely to return more money to shareholders via
dividends and buybacks. These actions enhance shareholder returns
in the years to come.
Below, we present three ETFs that hold companies focused on
enhancing shareholder value and thus can be excellent choices for
long-term investors. (See:
No Trick, Just Dividend ETF Treats for Q4
Dividend Growth ETFs for Long-Term
Dividend stocks and ETFs had seen a lot of interest in the past
2-3 years as investors searched for yield in the ultra-low
interest environment. However they have been out of favor of
late, since the taper talk started. Further, many sectors that
are traditionally high dividend payers-like utilities and
telecom-were punished by investors worried about the rate
However investors should remember that historically more than 40%
of the market returns have come from dividends. Among dividend
payers, I prefer companies that have been consistently increasing
their dividends in the past and have the potential to do so going
Stable, cash-rich companies that have a consistent record of
increasing their dividends have outperformed the boarder market
over the longer-term. (Read:
Dynamic ETFs to Energize your portfolio)
ProShares S&P 500 Aristocrats ETF (
NOBL follows the S&P 500 Dividend Aristocrats index that
targets companies that have increased dividend payments each year
for at least 25 years, and meet certain market capitalization and
liquidity requirements. The index weights its holdings equally
and each sector's weight is capped at 30% of the index weight.
Top sectors currently are Consumer Staples (24%), Industrials
(15%), Materials (13%) and Healthcare (13%). It has minimal
exposure (less than 2%) to Utilities and telecom.
The product has an expense ratio of 35 basis points and the index
currently has an attractive dividend yield of 2.57%.
While the ETF was launched very recently, the index has been
the broader market index with lower volatility since its
inception in 2005.
Over the past five years, S&P 500 Dividend Aristocrats index
had total annalualized returns of 19.4% compared with total
returns of 16.3% for the S&P 500 index.
Buybacks Continue to Outpace Dividends
While most investors prefer dividends to buybacks, the fact is
that companies have been returning more cash to shareholders via
buybacks than via dividends. Companies in the S&P 500 spent
about $3.1 trillion on buybacks from 2004 to 2012, while they
paid $2.1 trillion in dividends in the same time.
The trend has continued with share repurchases increasing to
$118.1 billion during 2Q 2013, up 18.1% from the prior-year
3 Niche ETFs Crushing the market
While dividends are simpler to understand and put money in the
pocket, buybacks have their own advantages-they reduce the
outstanding share count and thus increase earnings per share.
Further, they are more tax efficient.
PowerShares Buyback Achievers Portfolio (
PKW tracks the NASDAQ US Buyback Achievers Index, which is
comprised of companies that have repurchased 5% or more of their
common stock in the trailing 12 months.
The ETF has been outperforming the broader markets over the last
five years-it has returned ~176% versus 112% for the S&P 500
ETF. The product continues to shine this year too, with 38%
return compared with 26% for SPY.
The fund charges an expense ratio of 71 basis points currently.
ConocoPhillips, Amgen and Oracle are the top holdings as of now.
Focus on the Big Picture with Free Cash Flow
Free cash flow is key measure of the inherent strength of a
company. Three key indicators of free cash flow are dividend
payments, net share repurchases and net debt paydown, which
together determine the shareholder yield.
By looking at the shareholder yield, investors can get the big
picture of total capital return by a company to its shareholders.
Cambria Shareholder Yield ETF (
SYLD is an actively managed fund based on the research that
free cash flow is a key predictor of a company's strength.
This product invests in companies that show strong
characteristics in returning free cash flow to their shareholders
by way of cash dividends, share repurchases, or by reducing their
SYLD has a diversified portfolio of 100 stocks with market caps
greater than $200 million, with a tilt towards large cap stocks
that currently comprise 56% of the portfolio. Consumer
Discretionary (19%) Financials (18%) and Information Technology
(14%) occupy the top three spots in terms of sector exposure.
Expense ratio of 0.59% looks pretty reasonable for an actively
manage fund. Since it inception in May this year, the fund has
returned 11.9% compared with 7.8% for SPY during the same period.
The Bottom Line
Companies that consistently generate strong cash flows and
utilize that cash in ways that enhance shareholder value have
always tended to be strong performers over longer-term. Three
ETFs presented above present a convenient way to invest in such
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PRO-SP5 ARISTOC (NOBL): ETF Research Reports
PWRSH-BYBK ACHV (PKW): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
CAMBRIA SH YLD (SYLD): ETF Research Reports
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