Canadians are obsessed with income stocks. When searching for them, we tend to focus exclusively on dividend yield. But what if dividend yield didn’t tell you the whole story? What if some Canadian investors are receiving yields far higher, and it's not being widely reported? What are these income stocks in disguise?
Income investors need to be paying more attention to the concept of “shareholder yield”. Shareholder yield measures the total yield available to investors by combining a company’s well-known dividend yield with the relatively unknown “buyback yield”. To review, dividend yield is the amount of dividends issued by a company, divided by that company’s market value. It’s a widely reported figure and followed by every investor. The relatively unknown “buyback yield” is the total amount of money a company spends on buying back its own shares, divided by that company’s market value. To find this number, you have to dig into a company’s financial reports. This extra work is well worth the effort -- it gives us a more complete picture of how a company is rewarding its shareholders.
As an example, in 2014 one of the companies in the Growth Portfolio was showing a dividend yield of only about 0.56%, and flew under the radar of almost every income investor in Canada. However in addition to the $32 million that company spent on dividends, the company repurchased about $307 million worth of shares. The total spent on shareholders, then, was $339 million ($32m dividends + $307m shares repurchased). With a market cap of about $5.7 billion at the start of 2014, the total shareholder yield was 5.95% -- almost 10x their dividend yield for the year!
Responsible buybacks create positive opportunities for investors. By repurchasing shares, more earnings belong to fewer hands, so earnings per share (and return on equity) increase. This in turn increases the value of each share. In effect, shareholder yield investors give up periodic dividends for a larger capital gain. Their after-tax returns are even better, since Canadians are taxed on dividends in the year received, but defer paying tax on capital gains until shares are sold. Assuming good performance, companies with strong shareholder yield policies can be excellent tax deferral opportunities for income investors.
With yields near all-time lows, Canadian income investors need to look beyond traditional dividend yield to find return. After considering shareholder yield, many so-called growth companies are actually tax-efficient income companies in disguise.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.