Dividends + Buybacks = Great Returns

by Marc Bastow | January 9, 2013 12:15 pm

One of the age-old conundrums for retirement planning is finding the best allocation among assets, particularly with stocks. Too much exposure to one stock isn’t a very good idea, while trying to diversify risk out among 30 or so stocks isn’t very practical.

Then there’s the push and pull of investing in those stodgy old dividend stocks that pay a steady income or trying to find shiny new players that could add significant capital gains via stock buybacks.

Here’s an interesting twist: How about combining these two strategies? Suppose as part of a retirement planning portfolio, an investor found the intersection of 1) a dividend strategy as represented by a dividend fund’s holdings, and 2) a share-buyback strategy represented by a buyback fund’s holdings? The trick is to find companies with solid, long-term dividend-paying histories and those with longstanding share-buyback programs.

Guess what? Somebody already did this for you, and his results are certainly worth a look.

Brad Kenagy created such a list of stock picks[1] based on a hybrid of these two investment themes back in February 2012 by laying the holdings of the Vanguard Dividend Appreciation ETF (NYSE:VIG[2]) and PowerShares Buyback Achievers (NYSE:PKW[3]) side-by-side to find overlapping companies.

It turns out nine companies were in both funds: Becton Dickinson (NYSE:BDX[4]), Chubb (NYSE:CB[5]), ConocoPhillips (NYSE:COP[6]), Family Dollar (NYSE:FDO[7]), General Dynamics (NYSE:GD[8]), IBM (NYSE:IBM[9]), Lowe’s (NYSE:LOW[10]), PPG (NYSE:PPG[11]) and Target (NYSE:TGT[12]).

Kenagy’s hypothetical 2012 investment results? Take a look (returns include reinvested dividends):

Kenagy SPDR S&P 500 (SPY) PKW VIG
Return 15.43% 8.27% 7.05% 6.91%

That’s one heck of a strategy with one heck of a return. I like this approach for retirement portfolios for a number of reasons:

Where does the strategy go from here? Well, Kenagy provides the answer with his 2013 list, which now comprises 13 companies that combine these attributes. Only one name, ConocoPhillips, is no longer on the list, primarily because it spun off Phillips66 (NSYE:PSX[13]).

Added to the remaining 8 names are:

Specialized products and services company Cintas (NASDAQ:CTAS[14]), communications and info-tech provider Harris (NYSE:HRS[15]), railroad and transportation group Norfolk Southern (NYSE:NSC[16]), specialty insurer HCC (NYSE:HCC[17]) and diversified manufacturer Parker-Hannifin (NYSE:PH[18]).

Just for the record, the average P/E for the 2013 group is just over 14x trailing earnings, not a bad place to be, while the average dividend yield stands at just over 2%, not too terrific but still above the 10-year Treasury bond’s recent yield. And the new names add even more diversity, with a transportation and financial services company in the mix.

This is an intriguing strategy, and the resulting list is something you should review to see what, if any of it, works for you.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.

  1. Brad Kenagy created such a list of stock picks: http://seekingalpha.com/article/1099011-dividends-or-buybacks-why-not-both-2012-review-and-2013-picks
  2. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG
  3. PKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=PKW
  4. BDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BDX
  5. CB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CB
  6. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  7. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  8. GD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GD
  9. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  10. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  11. PPG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PPG
  12. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  13. PSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSX
  14. CTAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTAS
  15. HRS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HRS
  16. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC
  17. HCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HCC
  18. PH: http://studio-5.financialcontent.com/investplace/quote?Symbol=PH

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