Meb Faber Waves Red Flag On Dividend ETFs

September 29, 2014 How do buybacks fit into this?

Faber: These funds still ignore buybacks, which makes no sense. And the same problem happens with the buyback stocks and ETFs—they ignore dividends. It’s the most nonsensical thing on the planet.

But the reason the buyback funds are doing so much better than the dividend funds is that, right now, they are yielding a lot more. If you look at the yield on high-dividend funds, it’s around 3 percent, maybe 4, while the top buyback yield is around 6 percent.

Investors don’t care where they get the yield, it’s just the aggregate amount that they care about. So, the buyback funds are doing better because they have a higher yield, cash flow yield, than the dividend funds. Shareholder yield’s doing better than both because they combine the two.

And here’s something I keep saying: If you look at a lot of the dividend funds, many of the stocks are actually net issuers. Many of the dividend stocks that are above 4 percent in the Russell, for example, actually have a negative yield because they're issuing more than 4 percent of shares.

You think you're getting paid 4 percent but the company’s actually diluting you by more than 4 percent a year. It’s a net loss on the yield. But it’s hard for people to compute it. So are you better off just owning an S&P 500 fund versus a dividend-yield ETF, or a buyback ETF? What should an investor do?

Faber: No, you're better off owning SYLD [the Cambria Shareholder Yield ETF (SYLD | B-44)]. First, focus on the holistic yield. And, if you're including buybacks, which you should, you want the cheap companies.

It doesn't matter what sort of valuation framework you use, but to be able to at least quantitatively or objectively select or remove the expensive ones is key. Remember that the vast majority of stocks are twice as expensive as they have been historically.

Or, you're better off staying away from dividend yields, moving out of the U.S. and getting away from U.S. small-caps. Small-caps are the most expensive they’ve ever been relative to large-caps. Move to foreign.


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