Shareholder Yield – What Is It And Is It Any Good?
Shareholder yield beats dividend yield. History tells us that dividend stocks have outperformed those stocks that don’t pay a dividend (on aggregate). But perhaps dividend investing can be improved? This was the idea of Meb Faber, a famous money manager and founder of Cambria Investments, a decade ago. He sat down and tweaked dividend stocks a little. Meb Faber thought that the dividend is just one of several factors that influence shareholder returns. Why not include more factors? That’s what Meb Faber did and the result was that the shareholder yield became popular:
Shareholder yield is the sum of the dividend yield + percentage of shares bought back + the debt repaid yield. According to Meb Faber’s research, a high shareholder yield has produced better returns than most, if not all, dividend investing strategies, according to his backtests.
Let’s start by looking at shareholder yield in more detail:
What is shareholder yield?
Meb Faber defines three methods of rewarding shareholders in his formula for shareholder yield:
Shareholder yield is the total amount spent on dividends, share repurchases, and debt reduction. It’s not as easy to calculate as the dividend yield, but still fairly easy, in our opinion.
Why is shareholder yield more relevant than dividend yield?
Paying a dividend is just one of several ways the management and board can return profits and retained earnings back to shareholders to “reward” them.
For example, buybacks are one of those other methods of handing back capital to shareholders.
Paying down debt is also some form of returning capital to shareholders, according to Faber, because you increase the intangible and tangible values of the company, although it’s a much subtler way of “rewarding shareholders.
How do you calculate shareholder yield?
Let’s first give you a primer about dividend yield:
It’s easy to calculate the dividend yield: you simply take the dividend and divide it by the share price. If the annual dividend rate is 3 and the share price is at 100, then the dividend yield is 3%. Pretty simple and basic.
The next step is to calculate the buyback yield. To find the amount spent on buybacks you need to look at the cash flow statement. If the cash flow statement says that the company bought back 1% of the outstanding shares, the shareholder yield increases to 4% (dividend yield of 3% and buyback yield of 1%).
The last step is to find the debt reduction. This is more complicated, and again you need to look at the cash flow statement. However, debt repayment can be ignored, just as Cambria does in their ETFs (see more below).
What is the logic behind shareholder yield?
Faber argued that dividend yield looks at only one method of rewarding shareholders.
Meb Faber suggested a more “holistic” version that also looked at buybacks and the reduction of debt.
But why include more factors and complicate matters when dividend stocks have outperformed?
If you limit yourself to only dividend investing and dividend stocks, you are likely to overlook a lot of other factors that might be highly relevant.
For example, Berkshire Hathaway, Facebook, and Google have been exceptional good investments, yet they have never paid a dividend (except Berkshire once in the 1960s when Warren Buffett remarkably agreed to pay a small dividend – the first and last time).
Berkshire has been a fantastic investment precisely because it doesn’t pay a dividend! Berkshire has been able to reinvest earnings at very high returns, and hence it doesn’t make sense to pay a dividend unless you are a better investor than Warren Buffett (and you are likely not). We have explained the pros and cons of dividend investing earlier.
A backtest of shareholder yield:
The money manager Jim O’Shaughnessy backtested the shareholder yield strategy in an article called 7 Traits For Investing Greatness published in 2017. The results were impressive:
During all 3-year rolling returns periods, the top 10% shareholder yield companies beat large caps 81% of the time with an average outperformance of 3.24% annually. That is a massive outperformance! Over any 10-year rolling period the shareholder yield portfolio outperformed 97% of the time.
The 3.24% outperformance matters. 100 000 invested returning 10% annually is worth 672 000 after 20 years. But with 13.24% the value is 1.2 million after 20 years. Twice as much!
Please keep in mind that most shareholder yield backtests don’t include debt reduction because it’s slightly more complicated to find and calculate than dividend and buyback yields.
Shareholder yield ETF (SYLD) performance
If you want to have exposure to the stocks with the highest shareholder yields, you can easily get that via Cambria Investment’s shareholder yield ETF. The ticker code is SYLD for US stocks, FYLD for foreign stocks, and EYLD for emerging market stocks.
Below we look at the selection process and performance of SYLD.
The investment approach is solely quantitative and Cambria scans all stocks with a market cap higher than 200 million USD. Out of this pool, 100 stocks with the best combined rank of dividend payments and net buybacks are picked. To our knowledge, debt payments are not included in the mix. However, the fund also considers valuation, quality, and momentum metrics. The fund is thus actively managed but is more like a smart beta/factor fund.
On Cambria’s web pages the investment methodology looks like this:
We can argue the methodology is both thorough but also “simple”. The investment process is like this:
- Rank the stocks based on shareholder yield. Make a “pool” among the 20% with the highest yield.
- Screen for valuation, quality, and leverage among this group.
- Isolate the top shareholder yields after valuation, quality, and leverage.
- To avoid value traps, the final step is to sort on momentum (a historical anomaly in itself) to avoid value traps. The best stocks have good momentum.
Because of the specific investment process, you know exactly what you get when you invest in SYLD. As of writing, the top holdings are these:
You pay an expense ratio of 0.59% to let Cambria do the job for you.
How has Cambria’s shareholder yield fund performed?
Inception was as late as 2013 so the history is short, but the 5-year CAGR is 14.9% and the ten-year is 11.3. How does this compare to S&P 500? :
Keep in mind that SYLD pays a dividend, currently at 2.4%, when you look at total returns.
Shareholder yield – conclusion:
Shareholder yield is the sum of dividends, buybacks, and debt reduction.
The backtests of Meb Faber indicate that shareholder yield has produced better returns than dividend stocks. Shareholder yield is a more holistic approach to increasing returns and we would also argue for a more rational approach. Meb Faber’s ETF (SYLD) has, so far, indicated that Faber is right.