Dividend And Buyback ETFs: A Match Made In Heaven?

Includes: DVY, PKW, SDY, TTFS, VIG
by: Tom Lydon

Dividend-themed ETFs have been all the rage with investors looking to boost income in stocks rather than bonds. Meanwhile, an ETF focused on companies that are buying back their shares has outperformed the market by a wide margin.

Now, new research suggests that combining dividend and buyback strategies could result in a powerful and winning combination for ETF investors.

Chris Brightman is head of investment management at Research Affiliates, which manages indices that are used in PowerShares ETFs and Schwab mutual funds. He thinks stocks with the highest "total yield" - the added percentage of shares repurchased to the dividend yield percentage - are the best buys on the market, reports Shawn Tully for CNNMoney.

Brightman does not believe that dividends is the sole metric, so instead he looks at a value-oriented methodology that screens for dividends and the impact of stock buybacks.

Theoretically, if a company reduces its number of shares, for example by 1%, while keeping profits and the price/earnings ratio stable, the stock should see an increase of 1% in share price, he reasons.

Additionally, by combing for stable dividend sticks and companies that repurchase stocks, Brightman believes that these stocks could boost returns without venturing into volatile and risky firms.

While Research Affiliates is still developing a quasi-passive product based on Brightman's ideas, ETF investors can approximate the strategy through dividend and buyback ETFs.

Some of the largest dividend ETFs include:

  • Vanguard Dividend Appreciation ETF (NYSEARCA:VIG): 2.24% 12-month yield
  • iShares Dow Jones Select Dividend Index Fund (NYSEARCA:DVY): 3.53% 12-month yield
  • SPDR S&P Dividend ETF (NYSEARCA:SDY): 3.08% 12-month yield

For buyback stocks, investors can take a look at the PowerShares Buyback Achievers Portfolio (NASDAQ:PKW). Additionally, the TrimTabs Float Shrink ETF (NYSEARCA:TTFS) is an actively managed fund that focuses on companies that lower the number of shares outstanding.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.