The practice of corporations buying back stocks when they are cash rich is fading. Traditionally companies try to appease investors by bying their own stock if corporate earnings are soaring, as they are now. While companies are increasing buybacks in the profit and market rally, they’re giving more importance to dividends.
Buybacks remain the largest way companies return cash to shareholders. Big deal. So I make a profit on the investment of spending my money on a stock. Now I don’t own any shares anymore in that company and it is still a good company. People that make the most money in the stock market are those that never sell. Some stocks are held by people for thirty years and those people become millionaires. It would be nice to make an income in the form of a dividend each year from a stock purchase.
In the first quarter, companies spent $100 billion dollars buying back stock, that is more than the $70 billion dollars spent on giving cash dividends to share holders, says S & P Dow Jones Indices. But, the important distinction is that this time a significant portion of the cash being returned to the investors, 40% per cent is coming in dividends.
There are other signs of the rising importents of dividends now. The current 2% per cent dividend yield on the S & P 500 is well above the 1% per cent yield when stocks were peaking in 2000. There is a rising shift towards dividends as it represents a change in desires of investors. Some people will only buy a stock in a company if they will pay out a dividend. We want to keep our stock for an investment and we want some rewards now.
For some companies buying back it’s shares was a disaster. Look at Dell. The company bought back shares at $27.79 a share. The stock dropped down to its current price of $13.42 If Dell didn’t buy back any shares it’s value would have been 46% per cent higher now. See, even the big corporate giants make mistakes too sometimes.