Why these stock buyback ETFs might be a better bet than dividend funds

Published Tue, Mar 12 20246:31 AM EDTUpdated Tue, Mar 12 20247:15 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Investors weighing a shift into dividend stocks may be better off focusing on companies with big share buyback programs instead, according to Bank of America. ETF strategist Jared Woodard said in a March 8 note to clients that buyback funds have been outperforming their dividend-focused peers and could continue to strengthen. "The S & P 500 buyback factor has led dividend factors by 220-380 [basis points] per year since 1994 and has led the broad index by 2,800%. ... We have a Favorable View on buyback funds given 1) flexible sector exposure; 2) tax efficiency; and 3) widespread adoption of buybacks across management teams," the note said. A basis point is equal to 0.01 percentage point. The idea behind focusing on stock buybacks is that companies that can use excess cash to reduce their share count through buybacks are likely on strong financial footing. Additionally, buybacks let investors choose when to sell their stock and trigger a taxable gain, as opposed to receiving a quarterly dividend check. Buyback funds won't generate income at the some rate as their dividend counterparts, so they may not be a great fit for investors who want cash now. But for those looking for long-term return, buybacks could be the smarter pick while also lowering tax bills in the meantime. Bank of America's top pick in the space is a bit of a hybrid of the two strategies — the iShares Core Dividend ETF (DIVB) . The fund is up 23% over the past year. DIVB 1Y mountain The iShares Core Dividend ETF's performance over the past year. "DIVB is a total shareholder yield fund despite its 'core dividend' moniker. The fund screens for U.S. companies returning the most capital to shareholders through buybacks, dividends, or a combination of the two," Woodard wrote. The fund has an expense ratio of just 0.05%, and offers a yield of a little over 3%. Bank of America's other favorite in the space is the Invesco Buyback Achievers ETF (PKW) . This is more of a pure-play buyback fund, tracking the Nasdaq US Buyback Achievers Index. That means that all the stocks in the fund reduced their total shares outstanding by at least 5% in the trailing 12 months as of the index's last rebalance. The Invesco fund is more expensive, however, with an expense ratio of 0.62% "The fund has attractive sector exposure with high weights to energy and financials. PKW's high expense ratio weighs on the efficiency score," the note said. PKW has a total return of more than 25% over the past year, with a yield of less than 1%. To be sure, stock buybacks are a frequent target of politicians and their tax treatment could change in the years ahead. President Joe Biden called for raising the corporate tax rate for stock buybacks at his State of the Union address last week.