Face-Off: Dividend Growth And Buyback ETF

Includes: PKW, SPYB
by: Zacks Funds

Stocks and ETFs with a high dividend payout and increased buyback have always been investors' darlings. As a low interest environment is prevalent in most developed economies including the U.S., these products have been in vogue for the last couple of quarters.

Having said this, we would like to note that there is now reason to believe that the appeal for dividend growth ETFs may wane. Agreed, dividend securities emerged as a star in the latest market sell-off as investors at a loss sought safe and value destinations that can compensate for capital losses (if there is any) with current income to a large extent.

But some believe that this winning trend could soften a bit in the near term while buybacks can drive up markets in the upcoming period. We'll tell you why.

Deceleration in Dividend Hikes in Q4'15

Dividend net increases for the U.S. companies marked a 70.0% year-over-year decline in the fourth quarter of 2015. For full-year 2015, dividend net increases declined 29.4% year over year. There was a 22.2% decline in dividend increases (by 755 companies) and a 112% increase in the number of companies lowering their payout.

The situation can be blamed on the energy sector turmoil as these companies made up for 48% of the dividend cuts. The S&P 500's average dividend increase was 13.08% in 2015, considerably lower than 17.50% in 2014, per the source.

The Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) - a model to testify the performance of dividend growth stocks - lost 1.9% so far this year but added 3.7% in the last 5 trading sessions (as of February 19, 2016). VIG holds stocks of high quality companies that have a record of increasing dividend year over year.

Buybacks Forging Ahead

On the other hand, buyback activities are making headway this year. The S&P 500 companies raised third quarter repurchase by 14.5% to $150.6 billion. The rising trend is still in place in 2016.

As per Goldman Sachs (NYSE:GS), buybacks made about 20% of trading volume lately while Bank of America Corp. (NYSE:BAC) noted that American companies bought back more of their own shares in the first four weeks of 2016 than they did in the comparable period in 2015.

Analysts are of the opinion that companies are buying back stocks "just for prices to stay in place." Per S&P Dow Jones Indices, "for the seventh consecutive quarter, over 20% of the S&P 500 issues reduced their year-over-year diluted share count by at least 4%, therefore boosting their EPS by at least 4%."

Another cohort of analysts believes that companies are practicing more stock repurchases as shares are now more fairly valued after the recent sell-offs. Some also believe that whatever be the companies' motive, such frequent buybacks indicate the cash cushion of corporate America, as noted by Bloomberg.

The PowerShares Buyback Achievers Portfolio ETF (NASDAQ:PKW) targets the U.S. companies that repurchased at least 5% or more of their outstanding shares in the trailing 12 months. PKW tracks the NASDAQ U.S. Buyback Achievers Index, holding a basket of 213 securities.

McDonald's (NYSE:MCD) (5.54%), Boeing (NYSE:BA) (4.26%) and Qualcomm (NASDAQ:QCOM) (3.97%) are top three holdings of PKW's 233-stock portfolio. The fund charges 68 basis points as fees and returned 5.4% in the last 5 trading sessions but is down 7.4% so far this year (as of February 19, 2016).

Another buyback ETF the SPDR S&P 500 Buyback ETF (NYSEARCA:SPYB) which tracks the performance of the top 100 stocks with the highest buyback ratios in the S&P 500 in the last 12 months added about 2% in the last 5 trading sessions, though the fund is down 7% so far this year (as of February 19, 2016).

Bottom Line

We believe it is very early to say whether buyback ETFs can gain momentum ahead. Still, given the rising activities in the space, investors can watch the ETF duo. As far as dividend ETFs are concerned, investors should look for quality exposure. High yield funds can buy you sweet returns if the interest rate environment remains choppy.

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