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Morgan Stanley's big buyback and dividend hike show how stocks can beat bonds

Published Tue, Jun 28 20223:16 PM EDTUpdated Tue, Jun 28 20223:30 PM EDT

Zev Fima @zevfima

Several major banks announced dividend raises this week after the Federal Reserve's annual stress tests, which determined they were well capitalized and could withstand an economic downturn. For longer-term investors, it was a great reminder why it can pay to hang on during short-term market swings. Club name Morgan Stanley (MS) emerged as the big winner, announcing Monday after the closing bell an 11% dividend increase — plus a new $20 billion share buyback. Another Club name, Wells Fargo (WFC), hiked its dividend by 20%. Meanwhile, Goldman Sachs raised its dividend by 25%, Bank of America did a 5% dividend increase. JPMorgan and Citigroup made no dividends or buyback announcements. While pleased to see our holdings rank among the top in terms of shareholder capital allocation, the Morgan Stanley repurchase authorization, nearly 15% of its entire market capitalization as of Monday's close, was the most meaningful. This update also speaks to our Investing Club mantra this year: own stocks of high quality companies that make stuff, do things, and generate real earnings that they can then return to shareholders via dividends and buybacks. The magnitude of the dividend hikes are also something worth celebrating. For the most part, income-oriented investors have two options: they can seek out dividend-paying stocks or purchase bonds. While the former may offer a slightly higher payout, the latter offers more protection of principal. Looking only at the payout level and capital structure ranking, however, fails to account for the instrument's ability to protect buying power — or the amount of money available to spend. Consider: With a 10-year Treasury, an investor locks in a rate of return without the risk of the lender, in this case the U.S. government, cutting that payout. But locking in a rate can expose an investor to the risk of loss of buying power. That's the trade-off for the safety bonds offer. For example, had an investor