US dividend yield over time with an emphasis on the rule change to make companies\u2019 ability to buy back their shares easier.<\/figcaption><\/figure>\nThe point I do wholeheartedly agree with is the changing dynamics of shareholder rewards. Since SEC Rule 10b-18 passed in 1982, companies have steadily shifted from dividends toward buybacks. I don\u2019t think one mechanism is inherently better. Buybacks, done well, lift share prices over time. Dividends signal quality: a company confident enough to raise its dividend is signaling confidence in future cash flow, and companies are ultimately valued on future cash flows anyway. Both are just different expressions of the same underlying driver. If you\u2019re using dividends alone to screen for good companies, you risk missing a lot of good businesses that have simply chosen to return cash differently.<\/p>\n
What matters, at the end of the day, is what drives the ability to pay dividends or buy back shares in the first place: cash flow. Investors should look for companies that grow cash flow quickly over many years, or that generate healthy cash flow relative to their valuation. This is essentially the profitability factor, similar to how Avantis, which I\u2019m invested in, screens using operating cash flow divided by book value. It\u2019s not a standalone stock picking tool, but the empirical evidence shows companies generating strong operating cash flow, adjusted for one off items, tend to perform better over time.<\/p>\n
Todd, who ran a boutique fund before launching this Substack, has spent a long time researching and investing in dividend stocks. What I take from this piece isn\u2019t really about finding companies that won\u2019t die from poor management, it\u2019s about finding management, boards, and business structures that are antifragile: able to make sound decisions in a fast changing environment. That\u2019s really what good investors need in a world of trends that flare up every few months and fade within a year or two. You need a system to filter out the noise, or you\u2019ll end up dumbfounded by the market, especially if you\u2019re absorbing the wrong signals from what you see or who you listen to.<\/p>\n
After reading this piece, there\u2019s nothing particularly new to me. There have been a few other pieces of research that show the same thing. <\/p>\n
The important takeaway for investors is that dividends should be viewed as a potential factor to help find stocks that outperform the benchmark index, not as a wealth management construct in itself. So don\u2019t go too crazy about it.<\/p>\n
There might come a time when government policy changes how management decides to reward shareholders. If your investing approach is dictated by this kind of mechanism, that\u2019s a risk, because this isn\u2019t just about the US. Different countries\u2019 policies will change too, and who knows, perhaps more countries will follow the US\u2019s lead toward share buybacks, especially if dividend income continues to be taxed more heavily. If that happens, you could see companies well beyond the US moving in the same direction.<\/p>\n
So if your hunting ground for stocks is based on how management currently chooses to reward shareholders, whether through dividends or buybacks, that feels a bit flimsy to me. This is something investors should think about. I\u2019m not saying it shouldn\u2019t be a factor at all. I think most people would agree that if you want to find good stocks, whether they pay out through buybacks or dividends, the real focus should be on a strong free cash flow yield.<\/p>\n