Look Beyond Dividends for Income
Many investors who are concerned about the economic impact of higher interest rates and inflation have flocked to stocks with high-yielding dividends. Some of these investors, however, may only be enjoying the appetizer of a potentially more filling income meal.
- Many investors seeking to protect their portfolios from the corrosive impact of higher interest rates and inflation have been flocking to income generating equities. The result: one of the best performing characteristics or factors in equity investing has been dividend yield during the 12-month period ended June 30, 2022.
- Dividends, however, are just an appetizer in our opinion. Perhaps the most filling course is share buybacks, which reached $985 billion in the 12-month period ended March 31, 2022, compared to only $525 billion for dividends.
- Buybacks reduce the number of shares outstanding of companies, thereby increasing shareholders’ ownership. Investors have discretion over when to realize the effective return of capital as capital gains because they can choose when to sell their shares. This can potentially make share repurchases a more tax efficient return of capital than dividends.
- Innovative companies with strong balance sheets that are growing by capturing market share, we believe, may be candidates for share buyback programs. As they grow their sales and earnings, they may accumulate cash war chests for buying back their shares.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of August 2022. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
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