Five Things To Look For In Dividend Stocks

How to boost your returns and reduce your risk with dividends and buybacks

A new book in Mergent's investment strategy handbook series

The investment environment in the United States is still experiencing the effects of the global financial crisis. Investors are scarred and wary, interest rates are still low, fixed income yields are poor, and the economy is still struggling to make a solid comeback. In this environment more investors are looking to dividends for yield – and major companies are giving it to them. 

The returns on dividends are at a high and boosting these returns even further has been a stock buy-back bonanza. Many of the companies that are issuing dividends are the same companies that are buying back large percentages of their stock. The result is that investors in dividend and buyback stocks have been rewarded handsomely. 

In this third book on dividend and financial investment, Peter O’Shea and Jonathan Worrall explain how in this unusual post-financial crisis environment, dividends and buybacks can generate solid returns not found elsewhere in the market. Discussing the “who, what, where and why” of dividend and buyback investing, this book clearly explains how it can lead to attractive returns, stable income and lower risk at the same time.


  • Which dividend stocks return the most
  • Which stocks are buying back stock
  • The top international buy-back stocks 
  • The cheapest industries to invest in
  • How the investment landscape has changed
  • The top 20 most consistent dividend payers
  • The top 25 dividend yielding US industries 
  • A list of the top buy-back funds
  • Which tech companies have the most cash
  • The top dividend paying IT companies
  • Which ETFs are performing the best 

  • Which global dividend funds to invest in 
  • How buy-back stocks are beating the market
  • The top dividend paying international companies
  • The top buy-back announcements last year
  • How dividends return more over time
  • The effect of the crisis on corporate America
  • Where to look for high dividend yields
  • A list of Canada’s best dividend companies
  • How a stock buy-back generates value
  • Why investing in dividend stocks creates better yields

Why investing in dividend stocks creates better yields

There are two ways to get returns out of stocks: capital growth and income (dividends). Some people only pursue the former, preferring to day-trade, buy-and-sell, or perhaps even to leverage the capital growth over time to borrow to invest further. Others prefer to take it slowly and like the steady stream of income that dividends can bring. Some prefer a combination of the two. Whichever you prefer, dividend investing has been shown to generate greater returns that the overall stock over time. 

Our research has shown that investing in dividend stocks can be more fruitful than pursuing capital growth, particularly over longer periods of time.

This is the case with investing in a number of different markets - the United States, Canada, and even a broad portfolio of international companies - all in dividend yielding companies.

The graph below shows the result of an analysis of 199 companies that have consistently raised their dividends every quarter from 1986 to 2012. It shows these stocks as a whole outperformed the S&P 500 Index over this period.

Superior returns can also be demonstrated in numerous from long-term studies of returns of other dividend indexes benefits as well as in numerous studies. But the two words to emphasize are over time.

How investing in buyback stocks can generate solid yields

Stock buybacks are not new; in fact companies have been buying back their stock from the market for decades. They have, however, grown significantly in popularity since the Global Financial Crisis.  If you’re wondering why the market has been growing despite the fact the economy is still recovering and despite low company valuations, there is evidence that listed companies themselves are the largest buyers of stock. 

In 2013 some of the biggest stock buy-back announcements involved some of the market’s biggest names. Microsoft announced plans to buy back a massive $40 billion worth of shares and Home Depot $17 billion. ExxonMobil, IBM, Cisco, Wal-Mart and Merck all announced stock buy-back plans for about $15 billion each, Apple $14 billion and Oracle and 3M about $12 billion worth of shares. Some other big announcements were AT&T ($10.5 billion), Pfizer, General Electric, PepsiCo and Boeing and United Parcel Service ($10 billion each).  As of early 2014 the S&P 500 Buy-back Index had outperformed the S&P 500 in the previous six quarters. 

In a similar way that dividend stocks have been shown to generate greater returns than investing in non-dividend-paying companies, our own research shows how investing in companies that have regular ongoing buy back programs can pay off for investors over time.   As such buy-back stocks are important for income investors looking for yield.  

Our research shows a hypothetical $10,000 investment in the NASDAQ US Buy-back Achievers Index™ on March 28, 2002, would have been worth $25,699.99 on March 30, 2012. Comparatively the same $10,000 investment in the Russell Midcap Value Index would have been worth $21,619.80. This is an extra 18.87% or $4,080.19 after ten years.  Invesco PowerShares offers an exchange-traded fund based on the NASDAQ US Buy-back Achievers Index™ traded under the  ticker: PKW. 

Importantly our research shows that the value in buy-back stocks does not tend to die out immediately after a stock buy-back. There are several reasons for this, including that the companies that buy back their stock are fundamentally undervalued in the first place and that eventually the market realizes this is the case.  Another is that the solid cash flow and cash assets of those companies mean they are in a better position to grow and expand anyway. In any case stocks with regular buyback programs do have great potential to outperform the market over time.