Mebane Faber, co-founder and chief investment officer of Cambria
Investment Management, just rolled out Cambria's first solo ETF-the
Cambria Shareholder Yield ETF (NYSEArca:SYLD). The launch came hand
in hand with the publication of a short book titled "Shareholder
Yield, A Better Approach to Dividend Investing"-and together the
two debuts point to a subject near and dear to Faber.
In a recent visit with IndexUniverse.com's Cinthia Murphy,
Faber made the case that most investors take a myopic view to
dividend investing. He stressed that investors need to understand
companies can do a few things with extra cash, such as pay
dividends; buy back stock; or reinvest in the business.
Overall, Faber said a "holistic" approach to dividend-driven
investing is imperative, and he argued that his new ETF and three
other yield-focused funds that will follow will all hew to that
requirement. All the firm's funds are actively managed, including
the nearly $60 million Cambria Global Tactical ETF
(NYSEArca:GTAA), that was brought out in fall 2010 through a
partnership with AdvisorShares.
IU.com:Dividend-focused investing is a hot theme, but you
make the argument that we're too focused on a company's
operations than on its capital allocation. Why is that
This is an often-overlooked area. Dividends are great, and the
evidence has been that dividend-paying stocks-and
higher-dividend-yielding stocks-have outperformed the broad market
both in the U.S. and around the world for as long as anyone has
been calculating returns. But dividends are only one of five things
a company can do with its cash when it's making money:It can pay
dividends; it can buy back stocks; it can pay down debt; it can
acquire other companies; and it can reinvest in the business. The
last two are growth initiatives, where you're acquiring or
reinvesting internally, and the other three are ways of returning
cash to shareholders.
Our argument is that it doesn't make sense from an investor
standpoint to just focus on one of those areas because it doesn't
give you the whole picture. Particularly in the U.S., we've seen a
large shift starting in early 1980s from companies mostly paying
dividends to now buying back more stock. It was a structural shift
after the government passed a rule that gave companies safe harbor
from buying back their stock. Buybacks and dividends are basically
the same thing mathematically speaking, but buybacks have a little
better tax treatment than dividends, so we've seen this huge shift
to companies now paying out more in buybacks than paying out
dividends. To ignore that alternative route to cash distribution is
a big mistake.
IU.com:Is that the main reason companies seem to be
paying out less cash in dividends these days?
When you adjust the yield for the amount of buyback stocks, it
often changes the picture. You need to look at dividend and net
buybacks-you need to look at it holistically. A lot of companies
pay out $20 in dividends, but a lot of companies just like them
will pay out $20 in dividends and retire $20 worth of stock. It
doesn't make too much sense for us to focus on only part of the
Dividends are a simple story, and people are comfortable with
that. It's a little bit more difficult to track what companies are
doing with buybacks-they tend to be more volatile, too. But
research shows it doesn't matter how a company pays out its cash,
but the total amount they are paying is a better indicator of stock
performance going forward.
IU.com:Is it true that reinvested dividends represent
over half of an investor's annualized returns on a stock over
time; they're that important?
Over time, yes. If you take out dividends and just have price
returns, dividends end up accounting for a lot of the returns. But
that's because historically dividend yield has been around 4
percent, and they are around 2 percent now. It's a hypothetical
argument because if companies didn't pay out any dividends, the
stock returns would be all from price. But the message we are
trying to convey is that dividend yield is a very strong component
of returns over time.
IU.com:Are there other factors that go into this
The other lever of this discussion, the choice to do buybacks
should depend on where the stock is trading relative to the
intrinsic value of the company. If you are management or a
shareholder, you should only want to do a buyback when the stock is
trading for less than intrinsic value, so that you are getting,
say, a $1 for 80 cents or something like that-it's a very direct
transfer of wealth from seller to buyer. You are picking an
additional value arbitrage where you're buying your own stock for
cheaper than it's worth.
The flip side is also true. If a company is buying stock when
it's expensive, you're destroying shareholder wealth. So, what you
really want is companies that have a methodology or a systematic
process for buying back stocks rather than just buying back
regardless of what their prices are.
IU.com:A lot of people are now saying U.S. stocks are
overvalued. What happens, then, to this concept?
There's a chart in the book that shows what the total return of
stocks are when they're expensive and what they are when
inexpensive, and it goes a step further and divides those into the
components of the return-price increases and dividends-and what you
find is that when the stocks are expensive, essentially all of the
returns come from yield because you're not getting a price
We argue that it's even more important right now when stocks are
expensive to target these companies that pay out a large percentage
of their cash through dividends and buybacks. It's a perfect time
to be focusing on those companies.
IU.com:What's the biggest mistake investors make when
they jump into dividend-focused investing?
Dividends are great, but one of the problems with them is that if
you look at high-dividend-paying companies, they often have high
yields because of one of two things:They're either paying out a
huge part of their earnings as dividends or they are often fairly
leveraged. In both cases, that's a recipe for the company to then
cut the dividends going forward, and you can find in academic
literature that a lot of these high-yielding companies often don't
realize those dividends because they have to cut them and it's
And if you look at the returns of the highest dividend-yielding
stocks, they're often not that much better than the next 20 percent
of dividend stocks because of that higher risk. In 2008-2009, these
stocks got hit especially hard as value stocks for those
The other problem is that a lot of money has rushed into these
dividend stocks as people look for yield. So now you have this
compression where they used to trade at a discount to the overall
market, but now that's gone. If you compare the valuation of a
shareholder-yield portfolio to the broad S&P 500 and broad
high-dividend portfolio, it's a much cheaper portfolio, so you have
more of a low-valuation portfolio that you don't have in the
If you focus only on dividends right now, you'll end up with a
portfolio that's S&P-like with nothing more going on other than
paying out more in dividends with higher debt. In my opinion, that
doesn't sound great.
IU.com:Is this ETF you just rolled out, the Cambria
Shareholder Yield ETF, the answer to that problem? Can you
explain what shareholder yield is all about?
We think it's the answer. There are three components that go into
shareholder yield:dividends; net buybacks; and paying down debt-the
last one is not as clean-cut as the other two because that's not
directly distributing cash, but it's another way of shifting
ownership to the equity holder from the bond holder. We look at
those three, and we begin by sorting companies by yield, combining
both dividends and net buybacks. We don't care how you pay those
out as long as you have a high-enough number, and we reduce the
universe to the top 20 percent of those payers, and then we apply
additional screens based on valuation, quality, momentum and a
final sort on full-shareholder yield to come up with the final
We think it's a much more holistic look at all of the factors
together. There are other
in the market that focus on one or the other-dividends or
buybacks-but we argue that they're making a mistake by looking at
only one side of the coin.
IU.com:Does a strategy like this work in any market
environment, or it is particularly suited for the current
Essentially, you're buying quality companies that are inexpensive
that have the ability to distribute high amounts of cash, and
typically those qualities correlate very highly with quality U.S.
companies that are shareholder-friendly. You are also avoiding
companies that are not shareholder-friendly, like those that are
issuing a ton of stock and diluting their shareholders, and that's
important because you're not only taking what's good but you're
also avoiding what's bad.
If you just invest in a broad S&P fund, or broad market-cap
fund, you're getting those capital destroyers in your portfolio.
About 20 percent of companies have this negative yield where
they're diluting their shareholders. There are also a lot of
companies out there that pay high dividends but are issuing so many
shares that they swamp the dividends, diluting shareholders. People
who focus only on dividends would never see that, and I think
that's a really important story and something that people miss out
IU.com:What's your main objective with this ETF and the
book? This is your first fund launched under your own banner, but
there are already more in registration.
This is our first solo effort, but we have three more filed. Our
goal over the next few years is to launch five to 10 actively
managed funds that are quantitatively based, that are aimed at
disrupting the high-fee mutual fund and hedge fund space. This
particular fund takes aim at the dividend space, but we are looking
to disrupt mutual funds and hedge funds-where they are charging 2
percent in fees for 20 percent performance-by charging much more
IU.com:Why active management? Why not create an
I'm a quant, so everything we do could easily be indexed. I could
write down the rules in no time. But one of the dirty secrets of
indexing that no one talks about is that a lot of indexes get
front-run by hedge funds and other traders, and that's a very real
cost to the index and the fund. You disclose your rules, and the
next thing you know, there are traders out there front-running your
We're not looking at being black box; we want to give you an
idea of what we're doing, but we also don't want to say "here are
our exact rules," because that's a very real drag on performance
that a lot of these funds suffer from that publish their
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