There will always be a debate over which is a better method for returning cash to shareholders — dividends or stock buybacks. Happily for income investors hunting for dividend stocks to buy, there are plenty of companies offering both.
True, dividends have some advantages over stock buybacks. They’re supposed to be a permanent feature of those dividend stocks you care to buy, whereas buybacks can come and go. On the other hand, dividends suffer from being taxed twice — first as corporate earnings, and then again as dividend income.
Each has its pros and cons, but one thing is certain: Dividends and stock buybacks are both at record levels.
Indeed, buybacks and dividends combined hit a new record high of $241.2 billion in the first quarter (the latest available data), according to S&P Dow Jones Indices. The old record of $233.2 billion was set way back in the fourth quarter of 2007 — or right before the financial system started to melt down.
By taking shares out of circulation, buybacks make remaining shares more valuable. Earnings per share increase when there are fewer shares, which gives buybacks an accretive yield all their own. (An accretive yield of, say, 2% means the buyback will lift earnings per share by 2%, which — in theory — goes to shareholders.)
As long as price appreciation does its own part, dividend stocks benefiting from buybacks are almost turbocharged for total return.
The last week alone brought news of three notable dividends stocks initiating or adding to their stock buybacks. Here’s a look at them to help decide if they’re the right dividend stocks to buy: