Shareholder Yield Strategy: Beyond Dividends

Cambria Investment Management and Mebane Faber recently announced the Cambria Shareholder Yield ETF (SYLD). Faber outlines the Shareholder Yield strategy in his Shareholder Yield: A Better Approach to Dividend Investing.

The Shareholder Yield strategy is especially relevant today, with investors desperate for  yield in a low interest rate environment. The basic premise behind the strategy is that companies have three options for returning cash to shareholders – dividends, share buybacks, and paying down debt.

Dividends are the most widely understood method for companies to return cash to shareholders, but share buybacks and debt reduction are also methods for returning cash. Share buybacks increase the ownership stake of equity holders by reducing the number of outstanding shares. When a company pays down debt, it reduces its obligations to bondholders and shifts ownership to equity holders.  Tax policy can also influence how companies choose to return cash to shareholders – if dividends are taxed at a higher rate than capital gains, this creates incentives to return cash via buybacks and debt reduction.

Cambria’s fund fact sheet describes SYLD as “an actively managed fund that employs the manager’s quantitative algorithm to select U.S. listed companies that show strong characteristics in returning free cash flow to their shareholders. Specifically, SYLD invests in 100 stocks with market caps greater than $200 million that rank among the highest in (a) paying cash dividends, (b) engaging in net share repurchases, and (c) paying down debt on their balance sheets.”

Besides investing in SYLD there are other options for screening, testing and investing in a shareholder yield strategy.  I created a Shareholder Yield screen using Portfolio123 and backtested it to 1999. My Shareholder Yield screen attempts to closely mimic the one outlined by Faber and Cambria, but there will be differences since Cambria does not fully disclose their ranking methodology.

Shareholder YIeld can be defined in a simple equation as Dividend Yield + Net Buyback Yield + Net Debt Paydown Yield. The tests below use a custom ranking system to rank stocks based on these three factors.

The first test is a Shareholder Yield strategy on stocks in the S&P 500. The test purchased the top 20 stocks based on their Shareholder Yield and rebalanced every 8 weeks (4, 6, and 12 week rebalances also showed strong results). I assumed .25% in slippage to account for trading friction, dividends are included in the results, and the benchmark is SPY.

Results from 5, 10, and 14+ year (1/2/99-5/21/13) results are below:

Charts courtesy of Portfolio123

The overall results are strong when compared to SPY. However, taxes and commissions could be an additional drag on returns and the max drawdown of the strategy could also be too much for some to handle.

I am a fan of sacrificing some overall return for lower volatility and drawdown. The next test uses the same parameters as above with one added market timing filter. Stocks were only purchased on the rebalance date (every 8 weeks) if the benchmark (SPY) was trading above its 200 day simple moving average on the rebalance date. Positions were held for 8 weeks regardless of whether SPY dropped above/below the 200 day moving average between rebalance dates.

The 5, 10, and 14+ year results are below:

Charts courtesy of Portfolio123

Drawdowns were reduced as was total returns. An 8 week rebalance period reduces turnover, but it increases the likelihood that SPY could make a fairly significant move above/below its moving average between rebalance dates. This simple timing strategy may not be optimal, but is intended to show the potential for reducing portfolio drawdowns by employing some simple techniques.

What happens when we take share buybacks and debt reduction out of the equation and simply purchase the top 20 highest dividend yielding stocks in the S&P 500 every 8 weeks? In other words, are we accomplishing anything in the results above by screening for share repurchases and debt reduction?

The results of a high dividend yield strategy:

Charts courtesy of Portfolio123

The high yield strategy performed well compared to SPY, but under-performed both on a total and risk-adjusted basis in the 5, 10, and 14 year tests when compared to a Shareholder Yield strategy.

Cambria’s commitment to a Shareholder Yield ETF, the historical results outlined in Shareholder Yield: A Better Approach to Dividend Investing (and elsewhere on the web), and the results of the tests using Portfolio123  indicate that a shareholder yield strategy is worth our attention.

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