Focus on Total Yield, Not Dividend Yield

by Alan Gula
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Focus on Total Yield, Not Dividend Yield

Yield Hogs

Investors are gobbling up high-yielding dividend stocks like pigs at a feeding trough.

But these yield hogs tend to be fixated on dividend yield and high cash payouts.

Astute investors, on the other hand, focus on what’s known as total yield.

Total yield – a term coined by Chris Brightman, Chief Investment Officer at Research Affiliates – equals a stock’s dividend yield plus the net share buyback percentage.

For example, if a stock has a dividend yield of 2% and the company has reduced its shares outstanding by 3% through repurchases in the past year, its total yield is 5%.

Dividend yield and total yield can produce drastically different figures for the same stock.

Indeed, even companies that appear to be solid dividend payers can turn out to be terrible income investments once you examine their total yield.

Take General Motors (GM), for instance. This hedge fund darling is down 16% year to date – due in part to millions of vehicle recalls.

Yet with a solid 3.5% dividend yield and supposedly cheap valuation, GM seems like a good investment, right? Not so fast . . .

GM actually has a negative total yield because the company’s share count has increased by 12.5% in the past year. This shareholder dilution is not something long-term investors want to see.

So now that we’re focused specifically on total yields, where can we find the best “Buys”?

Be a Total Yield Hog

As it turns out, the reinsurance industry is full of companies that are buying back stock hand over fist, therefore creating juicy total yields.

Take a look…

Reinsurance companies basically provide insurance for other insurance companies. They take over policies from insurers looking to reduce their underwriting risk, or risk of loss.

Admittedly, reinsurance is anything but sexy. But boring is often a good thing as long as the company is producing an outsized, reliable stream of free cash flow (FCF).

As you can see from the table above, many of the companies in this industry are using FCF to reward shareholders by rapidly reducing shares outstanding.

The table clearly shows how total yield can change your perspective on a company in a hurry . . .

For instance, with a 1.1% dividend yield, RenaissanceRe (RNR) is probably not on many income investors’ radars. But its total yield is an impressive 10.1%.

Validus Holdings (VR) didn’t increase its dividend this year, which might raise a red flag for some investors. However, it has a whopping 20.3% total yield, the highest of the reinsurers shown.

Of course, one company that’s not surprising to see on the list is Reinsurance Group of America (RGA). If you recall, I recently discussed this S&P 400 MidCap Index constituent’s powerful combination of revenue growth and dividend growth.

Rounding out the list are Everest Re (RE), Montpelier Re (MRH), Axis Capital (AXS) and PartnerRe (PRE), all with double-digit total yields.

Better yet, the low price-to-book values of all of these reinsurance companies should give us comfort that their share repurchases are being conducted at reasonable valuation levels.

Bottom line: Yield hogs myopically focus on dividend yield, which is a one-dimensional metric. A stock’s total yield is a more complete measure of how much cash is being distributed to shareholders. Currently, the reinsurance industry is home to some of the highest total yields around.

Safe (and high-yield) investing,

Alan Gula, CFA

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