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The Simple Way To Invest In The Market's 'Buyback Kings'
1/18/2013 12:30:00 PM
Many top companiesissue an overlooked type of payment back to their shareholders... They work like traditional dividends, but with one major difference -- these "dividends" are completely tax-free.
These under-the-radar "dividends" are a favorite ofWarren Buffett and many other billionaire investors.
There's a good chance you've received one of these "tax-free dividends" before and didn't even realize it. That's because companies don't issue these "dividends" in the normal way.
They "issue" them by buying backshares of their ownstock .
You see, when a company buys back its own stock, it's similar to paying you a tax-freedividend . A buyback makes every share you own worth a larger piece of the company pie, but you don't have to paytaxes on your new portion of ownership.
On top of that, studies have shown that the share price usually rises afterward.
A study by U.K.-basedinvestment group Shore Capital Group found thatstocks with the biggest buybacks returned nearly four times more than thebenchmark FTSE 350Index in the past decade. This index covers the 350 largest companies bymarket capitalization on the London Stock Exchange.
Today, I'd like to show you how to purchase a basket of the top buyback stocks on themarket all at once.
Like its name suggests, the PowerShares Buyback AchieversETF ( PKW ) owns a basket of companies that excel in share buybacks.
To be eligible for thisexchange-traded fund (ETF) , a company must be incorporated in the United States, trade on a U.S. exchange and must have repurchased at least 5% or more of itsoutstanding shares for the trailing 12 months. Thefund 's portfolio is rebalanced on a quarterlybasis .
Right now, the fund's top-five holdings are IBM ( IBM ) , Home Depot ( HD ) , The Walt Disney Co. ( DIS ) , Intel (Nasdaq: INTC) and ConocoPhillips ( COP ) . Together, these five holdings make up 22% of the fund's overall portfolio.
This strategy seems to be working. The fund has gained 14% in the past year and 58% in the past three years.
By focusing on large U.S. companies that continually buyback shares, the fund is conservatively positioned. ETFs like PKW are perfect if you're the type of investor who wants to keep things simple with a "buy-and-hold " strategy.
One last tip: For more active investors, looking up the top holdings in ETFs like PKW or the Vanguard DividendAppreciation ETF (VIG) can give you a nice list of stocks for further research.
Risks to Consider: PKW only yields about 1% and charges a 0.7% annual fee. So investors eager for moreyield now might do better off byinvesting in the top five holdings directly.
Action to Take --> If you're looking for a pure "buyback" play that keeps things simple, then PKW should be right up your alley. For bargain hunters, wait for a pullback and purchase shares when they're selling at a discount toNAV .