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After about 14 months of running a Net Payout Yields Model on Covestor, I'm still stunned how few people understand the concept or even incorporate it into investing.

Net Payout Yields are the combination of the ever popular dividend yield and the always controversial net stock buyback yield. Or another way, the yield a company pays out to shareholders. No preference is given to whether the yield is obtained via dividends or buybacks.

It seems that most investors are in love with the dividend paying stocks, but hardly anybody can get behind stock buybacks. Oddly though, very few investors take advantage of the combination.

Would you rather have a stock paying just a 4% dividend yield or one paying a 3.5% dividend yield and a 8.5% stock buyback yield? A logical person would chose the later. Why not go for the stock yielding three times as much? Logic though doesn't work in the market as the typical investor these days will solely foucs on the highest paying dividend stocks.

For investors, the real benefit to the combination is that corporations can pay a consistent dividend and fluctuate the buyback. In a way, signaling to investors what management sees on the horizons. Or rather indicating that the future cash flow is much stronger than the market realizes.

This highlights the ultimate issue with the dividend concept. Corporations are not encouraged to ever cut dividends, which forces the board of directors to be very conservative with payouts. A steady, consistent increase wins the race, but it doesn't always reward the current shareholder.

This helps no one. Today's dividend investor has to wait years to recoup profits sitting on the balance sheet as companies hoard cash. Along came regulations in the 1980s that made buybacks a more legitimate payout option, allowing companies to increase and decrease payouts at the press of a button without negative sentiment from the market.

Ignoring these signals due to a few public buyback failures such as Netflix (NASDAQ:NFLX) belies the benefits. First, like dividends, buybacks tend to work better on the slow-growing, large-cap stocks. Would anybody have bought NFLX for a 4% dividend? Second, the buybacks only work when it's reducing the outstanding shares and the company isn't borrowing money to make the purchases. The company needs to be using cash generated by the business to buy the stock at cheap valuations.

Sectors like insurance, defense, and out of favor retail players litter the top-yielding list. Companies where the cash flow is strong, but so many doubts about the future exist that the porfitable operations are being ignored.

Below is the list of the top 12 net payout yield stocks for 2012:

Stock Ticker Company Name Net Payout Yield (%) Buyback Yield (%) Div Yield (%)
KSS Kohl's Corp. 24.7 22.7 2.0
LTD Limited Brands Inc. 21.9 19.9 2.0
GS Goldman Sachs Group Inc. 19.0 17.5 1.5
DTV DIRECTV Group Inc. 18.4 18.4 0.0
LMT Lockheed Martin Corp. 16.9 11.7 5.2
TWC Time Warner Cable Inc. 16.5 13.4 3.1
TRV Travelers Cos. Inc. 15.6 12.7 2.9
PGR Progressive Corp. 15.5 13.3 2.2
COP CONOCOPHILLIPS 15.4 11.5 3.9
AMP Ameriprise Financial Inc. 15.4 13.3 2.1
WLP WellPoint Inc. 15.3 13.8 1.6
LO Lorillard Inc. 15.2 10.4 4.8

* List sourced based on domestic stocks with a market cap above $10B.

Disclaimer: Please consult a financial advisor before making any investment decisions. All data provided for informative purposes and shouldn't be relied upon.

Source: Top 12 Net Payout Yield Stocks For 2012