Dividends & buybacks set record. What to buy

Published Wed, Feb 18 201510:43 AM EST

This bull market has $900 billion behind it. That's the combined total of buybacks and dividends by S & P 500 companies in 2014, a record, according to S & P Dow Jones Indices. "The theme for Q4 and 2014 continues to be shareholder return," said Howard Silverblatt, who is still tallying up the numbers contained in companies' 10-K filings. But Silverblatt has seen enough of them to determine that 2014 shareholder returns will be close or just at the $900 billion level, higher than 2007's record $846 billion and 2013's second-place $787 billion. Contrary to popular belief, dividends are back in favor with a record $92.8 billion last quarter pushing total capital distribution for the year to a new high, according to the analyst. Buybacks will post their second-best year ever, falling short of the 2007 record of $589 billion. This nearly trillion dollar backstop is one big reason the S & P 500 continues to climb to record levels, most recently on Tuesday, without a corrective pullback. Skeptics will say these returns—especially the buybacks—are just smoke and mirrors fueled by the Fed's zero interest rate policy, which companies used to borrow at record low rates and pay for the shareholder returns. Read More Chart trader: Nasdaq breaks out, others to follow But does that matter at this point? And for the investor who bought the companies with the biggest shareholder returns, they beat the market—bubble or not. The money play: Silverblatt highlighted eight companies that increased their buybacks the most last quarter. Six of those names— Apple , Intel , Boeing , FedEx , Oracle and Cisco —beat the market over the past 12 months. Halliburton did not because of the oil crash. AT & T continued to be weighed down by secular changes in the phone/cable industry, but the stock has started to outperform the S & P 500 this year. On the dividend front, the S & P 500 Dividend Aristocrats ETF , which is composed of 40 stocks that have increased their dividend over the last 25 years, is up 17 percent over the last year, besting the 14 percent return of the S & P 500. The PowerShares S & P 500 Low Volatility Portfolio , which counts big dividend payers and buyback issuers like Wal-Mart , Vornado Realty Trust , and Waste Management among its top holdings, is doing even better, up 24 percent the last 12 months. The companies are selected for their low daily volatility, an added bonus in this roller coaster market. Read More Are Box stock's best days already over? "Buy free cash flow generators with quality management and you'll get cash back," said Stephen Weiss of Short Hills Capital Partners. Weiss owns Orbital ATK because the aerospace company grew free cash flow (ammo for future buybacks and dividends) at a 7 percent annual rate the last 10 years. It pays a 2 percent dividend. Another thing of note in Silverblatt's research is that companies are not just issuing dividends and buybacks, but upping capital spending as well. So to the dismay of bears, investors right now are getting their cake and eating, too. Capital spending, the fuel for the next big products and ventures, is on track for a quarterly record and will be up 13 percent in 2014 over 2013, according to the researcher. Read More Hedge funds hate stocks, but that's bullish But the stocks with major capital expenditures increases did not fare as well. Google is evidence of that, down 10 percent over the past year. Strategist Jeffrey Saut of Raymond James has a unique way of playing capital spending by looking at companies with high intangible capital, the intellectual property like patents and processes that are used in innovation (Think Apple with iTunes, says Saut), but not carried on the balance sheet. He recommends clients buy LabCorp , Nvidia , EMC , Intuit and Becton Dickinson on this basis.

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This bull market has $900 billion behind it.