Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / The Quiet Power of Stock Buybacks for Income Investors
Transcript
- Lucas: Here is the thing about income investing right now that everyone misses. You look at the S&P 500 trading near 7,521, and you see a lot of noise about the ten-year Treasury yield sitting at 4.88 percent. Everyone is chasing the highest yield they can find in REITs or high-yield bonds. Luna: Right, because when safe rates go up, the pressure on dividend stocks to justify their payout ratios gets intense. It feels like we are back in that decay trap scenario from earlier this year. Lucas: Exactly. But there is a quieter engine driving total returns for many of these same companies. It is not the dividend check. It is the buyback. And if you ignore it, you are underestimating your actual ownership growth. Take Apple, for instance. They have been massive buyers of their own shares for over a decade. Luna: I remember reading that their share count has dropped by nearly forty percent since twenty nineteen, even while they grew their dividend slightly. That is a double-engine effect. Lucas: It is, but most listeners only track the dividend yield. The buyback is essentially a hidden dividend that compounds faster because it reduces the denominator. Fewer shares outstanding means your slice of the pie gets bigger every time they buy back stock, all without triggering an immediate tax event. Luna: So instead of getting a cash injection that you might spend, you are automatically increasing your equity stake in a company that is likely growing its earnings. That is mathematically superior compounding. Lucas: Before we dive deeper into the mechanics of how this works in practice, I want to mention something quick. If our money conversations have helped you think about a decision differently, or just made the complex parts of finance feel a bit less daunting, your support keeps this show ad-free and allows us to keep digging into these details. You can support us directly at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Yeah, and honestly, knowing that there is a community listening and engaging with these topics is what fuels the research. We really appreciate it. Lucas: Thanks. Now, let’s get back to the data. When a company buys back stock, they are using excess cash to retire shares. This boosts earnings per share, which often leads to higher stock prices. But here is the key for income investors: you do not have to sell shares to realize that gain. Luna: So your basis stays the same, but your percentage ownership goes up. It is like owning more of the business without actually buying any new shares yourself. Lucas: Precisely. And compare that to a dividend. When you take a dividend, you increase your cash pile but dilute your ownership percentage unless you reinvest immediately. With a buyback, the ownership increase happens automatically. It is tax-deferred until you choose to sell, and even then, it is a capital gain, not ordinary income. Luna: That tax efficiency is huge, especially in taxable accounts. But doesn’t this create a risk if the company uses debt to fund the buybacks? We saw some of that in the energy sector recently. Lucas: That is a valid concern. If a company borrows at five percent to buy back stock yielding three percent, that is value-destructive. But look at Berkshire Hathaway. Warren Buffett has consistently said he prefers buybacks when the stock is cheap relative to intrinsic value. He does not pay a dividend because he believes the best use of cash is retiring shares when the price is right. Luna: But Berkshire is unique because they have such a massive cash reserve. What about a typical consumer staples company? Can they sustain buybacks when margins get squeezed? Lucas: Good question. Let’s look at Procter & Gamble. Their stock is up eight percent over the last five days, trading around 168 dollars. They have a history of consistent buybacks alongside their dividend. The key is free cash flow coverage. As long as their buybacks are funded by operating cash flow, not debt, they are strengthening their balance sheet while boosting EPS. Luna: So the metric to watch isn't just the dividend yield, but the buyback yield relative to free cash flow. If a company is spending more on buybacks than it generates in cash, that is a red flag. Lucas: Exactly. You want to see the combined yield, which is dividend yield plus buyback yield. For many large-cap tech and health care names, the buyback component actually exceeds the dividend component. Ignoring half the return equation leaves money on the table. Luna: It also changes how you view valuation. A company trading at a low P/E ratio might look expensive on a forward basis if those buybacks accelerate next year, shrinking the share count further. Lucas: Yes, and that brings us to the current rate environment. With the Fed Funds rate at 3.88 percent, borrowing costs are not zero. Companies need to be disciplined. They cannot just print money to buy back shares. They need real, sustainable cash flows. Luna: Which makes quality even more important. High-yield junk bonds are risky right now, but high-quality companies with strong balance sheets can still afford to repurchase stock. It separates the winners from the losers. Lucas: Right. And notice how Johnson & Johnson is performing. Up one point six percent over the last five days to 280 dollars. They have a long history of dividend growth, but their buyback program has been steady too. It provides a floor for the stock price and supports earnings during cyclical downturns. Luna: So you are arguing that buybacks act as a stabilizer? When earnings dip, fewer shares mean the earnings per share don't drop as much, keeping the stock price more resilient. Lucas: Exactly. It is a mechanical buffer. Think about Coca-Cola. Trading at 96 dollars, up one point two percent. They have one of the most reliable dividend aristocrat histories, but they also buy back shares aggressively. It creates a compounding machine that works whether the market is up or down. Luna: I see. So for an income investor, the goal should be to find companies that do both: pay a growing dividend AND execute smart buybacks. That is the sweet spot. Lucas: That is the sweet spot. And it requires looking past the headline dividend yield. You need to calculate the total shareholder yield. Many financial screens highlight dividend yield alone. You have to dig into the cash flow statement to see the actual repurchase activity. Luna: It is frustrating that retail investors are so focused on the quarterly check. The real wealth building happens in the background, through share count reduction. Lucas: It is, and it is silent. No announcement, no fanfare. Just a quiet reduction in shares that benefits every holder proportionally. It is the ultimate passive income strategy if you hold long enough. Luna: Does this mean we should avoid companies that cut dividends to fund buybacks? That seems like a trade-off sometimes. Lucas: Not necessarily. Sometimes a company will maintain a modest dividend and ramp up buybacks to signal confidence in future cash flows. It is about the trajectory of total cash returned to shareholders, not just the form it takes. Luna: So flexibility is key. A company that shifts from dividends to buybacks isn't failing; it might just be optimizing its capital structure for tax efficiency and growth. Lucas: Exactly. And in today's market, with volatility lingering around the tech and health care sectors, that flexibility allows management to allocate capital dynamically. Buy back when the stock is cheap, raise the dividend when it is stable. Luna: It reminds me of how Berkshire operates. They hoard cash when things are uncertain, then deploy it when opportunities arise. It is patience applied to capital allocation. Lucas: That is the lesson. Patience and discipline. Whether it is a dividend or a buyback, the goal is to grow your ownership stake in high-quality businesses over time. The method matters less than the result. Luna: Agreed. And it changes how you evaluate a portfolio. It is not just about income today, but ownership growth tomorrow. Lucas: Right. So next time you look at a stock screen, don't just filter for yield greater than four percent. Look for companies with strong free cash flow and a history of aggressive share repurchases. That is where the real alpha lies. Luna: Because ultimately, owning more of a growing business is worth more than collecting a static check. Lucas: Exactly. And that compounding effect, left alone, can be far more powerful than any high-yield trap you might stumble into. Luna: So the question is not just what pays you, but what grows your stake quietly in the background. Lucas: Precisely. And that is a mindset shift that separates the serious long-term investor from the casual yield chaser. Luna: It really forces you to look deeper into the financials, but the payoff is so much clearer. Lucas: Absolutely. And as we move through the rest of 2026, watching how these companies navigate the rate environment will tell you everything you need to know about their commitment to shareholder value. Luna: So we stay curious, we look at the total yield, and we let the buybacks do the heavy lifting. Lucas: That is the plan. And who knows, maybe next time you check your portfolio, you will notice your share count is already higher than you thought. Luna: A pleasant surprise, delivered by the market itself. Lucas: Now that is a dividend worth waiting for.