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For this article, I will be looking at how potential tapering by the Federal Reserve, and the end of Quantitative Easing [QE], will affect dividend stocks and companies buying back stock. The table below shows a timeline of the dates that the Federal Reserve announced or ended its QE programs.

Start

End

QE1

November 25th 2008

March 31st 2010

QE2

November 3rd 2010

June 30th 2011

QE3

September 13th 2012

In Progress

For my comparison of dividends and buybacks during periods of QE and no QE, I needed to find two ETFs to compare. I used the Fidelity ETF screener to find a dividend ETF using the following screener criteria.

  • Index Composition: Dividend Weighted, Dividend Yield Weighted
  • Geography Objective: Domestic
  • Inception date: Before 12/20/2006 [PKW inception date]
  • Capitalization Objective: Broad/Multi-Cap
  • Dividend Yield: >2.62% [Current 10 year yield]
  • Expense Ratio: <=0.50%

After entering the above criteria, I found that four ETFs met the criteria, and I decided to use the one with the lowest expense ratio, which was the WisdomTree Total Dividend ETF (NYSEARCA:DTD). For a buyback ETF, I chose the PowerShares Buyback Achievers Portfolio ETF (NYSEARCA:PKW), because it is the oldest and the only buyback ETF that was available prior to the start of QE. The chart below shows the comparison of DTD to PKW since the start of QE1 until now. The chart clearly shows that buybacks have significantly outperformed dividends since the start of QE. This makes sense, because with QE driving down interest rates, companies can borrow money for cheap to buy back their own stock.

(click to enlarge)

Now that it is clear that buybacks have outperformed dividends since the start of QE, I then looked at how each fared when previous rounds of QE ended. The first way I looked at this was simply comparing the returns of DTD and PKW during these periods, which is shown in the two tables below. The first table shows that during each round of QE, DTD underperformed PKW by an average of 12.45%. The second table shows that when there is no QE, DTD outperformed PKW, even though the average outperformance was small, it was a significant change from when there was QE.

Start

End

DTD

PKW

DTD-PKW

QE1

November 25th 2008

March 31st 2010

33.45%

52.42%

-18.97%

QE2

November 3rd 2010

June 30th 2011

12.81%

16.10%

-3.29%

QE3

September 13th 2012

In Progress

21.73%

36.83%

-15.10%

Average Under/Over Performance

-12.45%

No QE

Start

End

DTD

PKW

DTD-PKW

End QE1 to Begin QE2

June 1st 2010

November 2nd 2010

13.49%

12.53%

0.96%

End QE2 to Begin QE3

July 1st 2011

September 12th 2012

12.71%

10.70%

2.01%

Average Under/Over Performance

1.49%

[Total Return Data from Dividendchannel.com]

The second way I looked at this was a ratio chart showing the ratio of DTD to PKW. The chart clearly shows the effects of QE. Before QE started, dividends were outperforming buybacks, which is shown by an increasing white line before the start of QE 1. Once QE 1 started, the chart clearly shows that buybacks started outperforming dividends represented by a falling white line. The chart also shows that in the months following the end of each round of QE [Red Lines], DTD sharply outperformed PKW, which is what I would expect to happen when QE 3 ends.

(click to enlarge)

Closing Thoughts

In closing, I believe when QE is eventually ended, dividend ETFs will outperform buyback ETFs as they have done in the past when previous rounds of QE have ended. While the initial reaction to the end of QE may be a sell-off in dividend stocks in SPDR S&P 500 (NYSEARCA:SPY), because of rising interest rates, dividend stocks I believe in the longer term will outperform buybacks in an environment when there is no QE.

Disclaimer

Source: When QE Stops, Favor Dividends Over Buybacks