Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Yields vs Buybacks in a Flat Rate World
Transcript
- Lucas: So, Luna, you know how we've been talking about the steepening curve and what it does to dividend stocks? Well, there's a quieter story underneath all that, and it's about buybacks. Luna: You mean companies choosing dividends over buybacks? I've seen a few headlines, but what's the actual shift? Lucas: Exactly. With the Fed holding at three point six three percent and the ten-year Treasury pushing up to four point six nine, the cost of capital has changed. And that's making boards think twice about buying back stock at elevated prices. Instead, they're prioritizing the dividend. Luna: So it's not that buybacks are bad, it's just that the math has changed? Lucas: Right. In a flat rate world, a dollar spent on a buyback might not generate the same earnings per share boost it used to. But a dividend is a hard commitment. It's a signal to investors that management has confidence in the cash flow. Luna: And in a world where yields are still relatively low, that commitment is becoming a bigger deal. Lucas: It is. Look at Coca-Cola—up four point seven percent over the past week. That's not just because of a good quarter. The market is rewarding the stability of that payout. Luna: So, if a company is pausing buybacks to protect the dividend, is that a good sign or a red flag? Lucas: It depends on why they're pausing. If it's because they see better investment opportunities, that's one thing. But if it's because the dividend is eating up too much of free cash flow, that's a warning. Luna: So the payout ratio becomes the key metric. Not just the yield. Lucas: Exactly. We've said it before, but the payout ratio tells you how sustainable the dividend is. If a company is paying out eighty percent of earnings, there's not much room for error. Fifty percent is a lot more comfortable. Luna: And that's why you love a stock like Johnson & Johnson, with its payout ratio well under sixty percent. Lucas: J&J is up three percent on the week, and its dividend has grown for over sixty years. That's the kind of stability that matters when rates are flat and the market is uncertain. Luna: Yeah, and I think that's the real takeaway for listeners: don't just chase the highest yield. Look for the company that can sustain and grow its payout. Lucas: Which brings me to something we've been meaning to talk about. A lot of you listen to this show while you're doing your own research, and we love that. We actually keep this podcast ad-free because of listener support. If our conversations have helped you think about your dividend strategy differently, consider buying us a coffee at buy me a coffee dot com slash fexingo. Luna: Yeah, it's the best way to keep us going. And it's a small gesture that makes a big difference. Lucas: But back to the buyback pause. We're seeing it in the consumer staples space, but also in tech and industrials. And it's not just a US thing. Samsung just announced plans to return up to eighty billion dollars to shareholders, partly through buybacks. Luna: That's massive. But are they cutting the dividend to fund the buyback? Because that would be counterintuitive. Lucas: No, they're actually increasing the dividend and doing a buyback on top. But the point is, they're being strategic about returning cash. In a flat rate world, you can't just buy back stock at any price. Luna: So, for the individual investor, how do you tell if a company is managing its buybacks wisely? Lucas: Look at the buyback yield relative to the dividend yield. If a company is spending more on buybacks than on dividends, but the stock is overvalued, that could be a red flag. You want buybacks that are earnings accretive, not just price supportive. Luna: And in a flat rate world, where valuations are still pretty stretched, that's a real concern. Lucas: Exactly. The S&P 500 is down zero point nine percent over the past week, but dividend payers like Coca-Cola and J&J are holding up better. That's the flight to safety, but it's also a flight to yield. Luna: So, what's the practical takeaway for someone building a dividend portfolio right now? Lucas: First, focus on payout ratios—keep them under sixty percent. Second, look for companies with a history of dividend growth, not just a high yield. And third, be wary of companies that are cutting buybacks to fund the dividend, because that's often a sign of stress. Luna: And remember, total return is what matters. A stock with a three percent yield and seven percent earnings growth often beats a six percent yielder with no growth. Lucas: That's the long view. And it's one we've seen play out over decades. The companies that win are the ones that can grow their dividends at a reasonable pace without stretching their balance sheets. Luna: So, in a flat rate world, the dividend is almost like a bond, but with more upside potential. Lucas: That's a good way to put it. But you have to be selective. Not every high yielder is a good bond substitute. You need to check the payout ratio, the balance sheet, and the industry dynamics. Luna: And that's where the real work comes in. But it's worth it, because a well-constructed dividend portfolio can provide income for decades. Lucas: Absolutely. And with the Fed on pause and rates expected to stay flat for a while, dividends are likely to remain a key source of returns. So, getting it right now is more important than ever.