Increasing Net Buybacks with a Quality Approach

“The market¹ looks expensive” is a common refrain we hear today. Sure, after a seven-year bull, the U.S. market as a whole looks more expensive. Yet some prognosticators say we can get as low as zero real returns from the U.S. markets over the coming years. This is too pessimistic in my view, and I will point to the part of the market that looks most attractive to me from a return expectation standpoint. Professor Jeremy Siegel, in his book Stocks for the Long Run, showed that the long-term average real (after-inflation) return on stocks approximated 6.5% over many periods. Based on the dividend yield and net buyback yields, I see our Quality Dividend Growth Index of stocks offering valuations supportive of returns a tad lower than Siegel’s long-term research. The summation of current dividend yield and net buyback yields can be viewed as an important indicator for long-term return potential. The reason: An investor does not need to assume there is any real growth on top of those two sources of returns. Net Buyback Yields Shareholder Yields: Dividend Yield Plus Net Buyback Yield Current Comparisons In a blog post titled “Why Dividends and Buybacks Matter to Investors”, we showed how the WisdomTree U.S. Quality Dividend Growth Index and the WisdomTree Dividend ex-Financials Index had a combined dividend and net buyback yield close to 6%.² These were the two highest combined dividend and net buyback yields of our various U.S. Indexes, and we believe they are two of the most attractively priced segments of the U.S. markets from a pure valuation standpoint (measured solely on this dividend and net buyback indicator). A few interesting benchmarks: The S&P 500 Index had a combined dividend and net buyback yield of 4.36%.³ When we look at the large-cap universe of stocks over the last 15 years, it has averaged a combined dividend and net buyback yield of 3.1%.⁴ Although the summation of the current dividend yield and net buyback yields for the above are lower than Siegel’s constant of 6.5%, current readings don’t look expensive compared to the recent 15-year history. Assuming no growth and no change in valuations going forward, an investor could expect to earn the combined dividend and net buyback yield, currently higher than the zero some prognosticators are predicting.         ¹Market refers to the S&P 500 Index. ²Source: WisdomTree, as of 3/17/16. ³Sources: WisdomTree, FactSet, Standard & Poor’s, as of 3/31/16. ⁴Sources: WisdomTree, FactSet, 3/31/01–3/31/16.