Better Yields

Many cautious investors who are seeking stable companies that offer decent income and good value look at dividend yields. But there’s a better yield measure to help you judge whether an income-producing stock is a good value. Check on “shareholder yield,” which is the sum of the dividend yield and the percent of outstanding shares in its own stock that a company has bought back over the past year. Example: A company that has bought back 3% of its shares and has an ­annual dividend yielding 2% has a 5% shareholder yield.

Why include the buyback percentage? Large buybacks indicate that senior management thinks the stock is a bargain, and the buybacks often push up the stock price. (Whether the stock is a bargain also depends on what multiple the stock price is of sales, earnings and cash flow.)

Stocks with relatively high shareholder yields have outperformed broad market indexes in the periods from January 1, 1927, through November 30, 2013…and from January 1, 2000, through November 30, 2013.

My favorite undervalued stocks with some of the highest recent shareholder yields in the S&P 500…

LyondellBasell Industries NV (LYB) makes chemicals for products ranging from antifreeze to cosmetics (recent shareholder yield: 13.1%).

Northrop Grumman (NOC) specializes in military aviation and missile defense systems (11.1%).

Seagate Technology (STX) makes data-­storage products such as hard drives (12.1%).

Travelers Companies (TRV) offers insurance (11.1%).

If you prefer the diversification of a fund, the Cambria Shareholder Yield ETF (SYLD) invests in about 100 stocks with high shareholder yields.