Investors love dividend-paying stocks. And who wouldn’t? The secret to successful dividend investing: Look for profitable companies that earn so much cash in good times and bad that they can reward shareholders. Investment advisor John Reese points out that, since the late 1990s, dividend yields have been far lower than their historical averages because of legal, tax and structural changes in the US markets. Instead, companies are returning profits to shareholders in less visible ways. That means traditional dividend investors may overlook promising companies.

Reese uses a strategy called “shareholder yield” that tweaks dividend investing to find the best stocks. Since its 2009 inception, Reese’s Shareholder Yield Investor portfolio, weighted equally and rebalanced once a year, has crushed the S&P 500’s performance of 12.7% with an annualized return of 22.4%.*

Bottom Line Personal asked Reese to describe how his shareholder-yield ­strategy works and which stocks his screens are recommending now…

How it Works

Since 1926, nearly one-third of the S&P 500’s total return has come from dividends. But in the mid-2000s, research by investor Meb Faber (and others) showed that many great, long-term dividend stocks—companies with strong financial positions and business models—were using their excess cash not just for annual dividend payouts. Management was acting in other shareholder-friendly ways, such as by repurchasing company stock and reducing long-term debt. Examining all three of the following factors when gauging a potential investment is the basis of my shareholder-yield strategy…

Dividend yield. This is the annual dividend that a company pays divided by its stock price. How it benefits investors: If you choose not to invest them, dividends can provide a source of income. They also can help offset pullbacks in share price during tough times. And the growth potential of dividend income can help minimize inflation’s impact. What I look for: Companies with long, steady records of paying dividends…and a dividend yield greater than the median dividend yield of S&P 500 companies, recently about 1.5%. While our model uses the median yield, the current yield on the S&P 500, which stands at 1.47%, is a good proxy.

Stock buyback yield. This is the shares the company has repurchased over the past year divided by the company’s market capitalization. Market cap can be found on most major financial research sites, including Morningstar, Yahoo Finance and The Wall Street Journal (WSJ.com). How it benefits investors: When a company repurchases its own shares on the open market, it reduces the supply of its available stock for sale. That makes the stock look attractive by spreading profits over fewer shares and boosting earnings per share. Because each share is more valuable, investors tend to bid up the stock price. Buybacks also reflect a vote of confidence from senior management that the stock price will go up. What I look for: Stocks with a buyback yield in the top 20% of the broad stock market. While buyback yield is not a commonly reported metric, it is reported by some data providers. On Google, search for “buyback yield [ticker symbol or company name]” to see the buyback yield for a specific firm.

Debt-paydown yield. Calculate this percentage by dividing the change in the amount of long-term debt the company has over the past year by its market capitalization. How it benefits investors: It helps filter out low-quality and high-debt companies. Companies often take on debt for strategic expansion, but too much debt can cause problems, especially in an economic downturn or recession. Paying back debt removes a major component of risk for shareholders. While debt reduction is not as immediately apparent to shareholders as dividends are, it is beneficial in the long run. What I look for: Stocks with debt-paydown yields in the top 20% of the broad stock market.

Best dividend Stocks Now

I created a screen based on Meb Faber’s research, ranking stocks in the broad market on these factors. I also applied a valuation screen to eliminate stocks selling above the median price-to-earnings ratio (P/E) for the broad stock market. Investors can use the current market P/E, found on most financial sites. The most highly rated stocks in my screen…

AT&T (T). In the past few years, the telecom giant exited the entertainment business, built out its 5G network and attracted wireless phone customers. Free cash flow should continue to expand in coming years, allowing AT&T to reduce debt while continuing to fund its high-yield dividend. Recent dividend yield: 6.85%. Recent share price: $16.60.

Carter’s (CRI) makes budget retail apparel for children under brand names such as OshKosh B’gosh. Easing inflation could improve profitability at its more than 1,200 stores. In 2022, management authorized a $1 billion share-buyback program. Recent dividend yield: 3.68%. Recent share price: $81.47.

Chord Energy (CHRD). Formed by the merger of Oasis Petroleum and Whiting Petroleum in 2022, this company operates more than 3,500 crude-oil and natural-gas wells. Cost savings from the merger has increased free cash flow. Chord has committed to shareholder-friendly practices, including doubling its base dividend and authorizing a $750 million share-­repurchase program. Recent dividend yield: 7.43%. Recent share price: $159.85.

Equitable Holdings (EQH). The financial-services giant provides annuities and 401(k) plans to more than five million clients globally. Its investment-management firm, AllianceBernstein, oversees $700 billion in assets. In 2021, Equitable authorized a $1 billion share-repurchase program. Recent dividend yield: 2.55%. Recent share price: $34.45.

Jefferies Financial Group (JEF) has been hurt as higher interest rates and recession fears weighed on mergers and acquisitions and IPOs. But with interest rates set to fall, investments banks are poised for a rebound. Jefferies is in the midst of a share-buyback program that, since 2020, has amounted to nearly $2 billion. Recent dividend yield: 2.91%. Recent share price: $41.23.

Navient Corp (NAVI) provides educational loans to students as well as servicing loans for itself and third parties. Its nearly $40 billion portfolio of Federal Family Education Loans provides a predictable revenue stream. Plus, the end of the federal government’s moratorium on student loan repayments last year could improve Navient’s earnings. Navient approved a new share-repurchase program for up to $1 billion in 2021. Recent dividend yield: 3.97%. Recent share price: $16.11.

Plains GP Holdings LP (PAGP) is the general partner of an energy infrastructure network that transports, stores and processes more than seven million barrels a day of crude oil and natural-gas liquids, It has bought back $300 million in stock since late 2020. A merger with Plains’ operations and Oryx Midstream Holdings should produce cost savings and reinforce its dominance in the Permian Basin in Western Texas. Recent dividend yield: 6.63%. Recent share price: $16.90.

Service Properties Trust (SVC). This real estate investment trust (REIT) rents out its 1,100 properties to hotel chains and travel centers. In 2022, it sold off a portion of its real estate portfolio to pay down $1.5 billion in debt. This play will benefit from a rebound in business travel in coming years. Unlike corporate dividends, which are taxed at a 15% to 20% rate, dividends from REITs are taxed as ordinary income, but they qualify for the 20% qualified business income (QBI) deduction. Recent dividend yield: 10.78%. Recent share price: $7.42.

Spectrum Brands Holdings (SPB). This company’s brands include Black & Decker, Remington shavers and IAMS pet food. As part of a restructuring to pay down debt, Spectrum sold off its hardware and home-improvement division in 2023 for $4.3 billion, and the company has repurchased $534 million worth of its own shares. Recent dividend yield: 2.13%. Recent share price: $78.70.

Xerox Holding Corp (XRX). The print equipment and software manufacturer has fallen by the wayside as digital technology has taken over. Despite slow growth, Xerox is also attempting to enter new markets such as digital print packaging solutions and printed electronics. In 2023, it agreed to repurchase more than a half-billion dollars’ worth of Xerox stock shares from corporate activist Carl Icahn. Recent dividend yield: 5.31%. Recent share price: $18.82.

If you’d rather own an exchange-traded fund that uses a shareholder-yield strategy, consider…

Cambria Shareholder Yield ETF (SYLD). Offered by Meb Faber’s fund company, Cambria Management, this ETF offers an equal-weighted portfolio of 100 companies that return cash to shareholders through a combination of dividends, buybacks and debt paydown. CambriaFunds.com

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