I want to share a great question asked by one of my viewers during last night’s show:
What’s the deal with dividends – why do some stocks offer them and others don’t?
Thanks, Michelle
In reality, companies are buying back their own stock or issuing dividends; both are considered ways of sharing the profits with their shareholders, however, there is a profound difference.
A buyback makes your shares more valuable because there are fewer outstanding shares, and dividends are payments to a company’s shareholders that are typically sent out on a quarterly basis. The thing is, companies are plowing so much money into buybacks that it means fewer funds for those dividend checks. In the last three years, the S&P 500 have bought back $1.49 trillion of their own shares.
During that time, they only issued $974 billion in dividends. The result is that the dividend yield (which is the percent of dividend payment versus the value of share price) is near an all-time low of 1.9%, the historic yield is 4.4%.
This trend has helped stocks move higher, but it hurts retirees and others looking for a nice, steady, and healthy return.
Note: buyback announcements are mostly promises, but a plan that may or may not happen, whereas a dividend is a promise that takes more confidence to make.
