Faber: Payout ETFs Not All About Dividends
Mebane Faber, co-founder and chief investment officer of Cambria Investment Management, just rolled out Cambria’s first solo ETF—the Cambria Shareholder Yield ETF (NYSEArca: SYLD). The launch came hand in hand with the publication of a short book titled “Shareholder Yield, A Better Approach to Dividend Investing”—and together the two debuts point to a subject near and dear to Faber.
In a recent visit with IndexUniverse.com’s Cinthia Murphy, Faber made the case that most investors take a myopic view to dividend investing. He stressed that investors need to understand companies can do a few things with extra cash, such as pay dividends; buy back stock; or reinvest in the business.
Overall, Faber said a “holistic” approach to dividend-driven investing is imperative, and he argued that his new ETF and three other yield-focused funds that will follow will all hew to that requirement. All the firm’s funds are actively managed, including the nearly $60 million Cambria Global Tactical ETF (NYSEArca: GTAA), that was brought out in fall 2010 through a partnership with AdvisorShares.
IU.com: Dividend-focused investing is a hot theme, but you make the argument that we’re too focused on a company’s operations than on its capital allocation. Why is that important?
Mebane Faber: This is an often-overlooked area. Dividends are great, and the evidence has been that dividend-paying stocks—and higher-dividend-yielding stocks—have outperformed the broad market both in the U.S. and around the world for as long as anyone has been calculating returns. But dividends are only one of five things a company can do with its cash when it’s making money: It can pay dividends; it can buy back stocks; it can pay down debt; it can acquire other companies; and it can reinvest in the business. The last two are growth initiatives, where you’re acquiring or reinvesting internally, and the other three are ways of returning cash to shareholders.
Our argument is that it doesn’t make sense from an investor standpoint to just focus on one of those areas because it doesn’t give you the whole picture. Particularly in the U.S., we’ve seen a large shift starting in early 1980s from companies mostly paying dividends to now buying back more stock. It was a structural shift after the government passed a rule that gave companies safe harbor from buying back their stock. Buybacks and dividends are basically the same thing mathematically speaking, but buybacks have a little better tax treatment than dividends, so we’ve seen this huge shift to companies now paying out more in buybacks than paying out dividends. To ignore that alternative route to cash distribution is a big mistake.
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