Stocks for Income -- Dividends and Buybacks

06/09/2015 09:59 pm ET | Updated Jun 09, 2016

When you think of buying stocks, you're likely focused on selling them at a profit! After all, that's what stocks are all about: buy low and sell high! But stocks can provide an additional benefit for your finances -- one that is attracting more attention these days. Stocks can provide income.

In fact, dividends are a key component of total stock market returns. Over the past 75 years, dividends have accounted for 44 percent of the total return of the S&P 500. In other words, nearly half the gains in the stock market have been made by reinvesting dividends over the long run.

But dividends take on even greater than theoretical returns if you need income to live on. With banks paying very low rates on CDs, dividends make stocks even more attractive to investors. That's one reason for the stock market's gains. So far this year, dividends have contributed more than 20 percent of the return on the S&P 500.

Buying Dividend Income

The S&P 500 currently yields 1.94 percent, more than triple a money market fund or short-term CD. And many stocks have far higher dividend yields. Of course, many stocks have high yields because their stock prices have been beaten down -- meaning business is bad and dividends could be cut. For more on dividend investing, go to Chuck Carlson's website --

It's estimated that there's more than $1 billion of corporate cash sitting on the sidelines these days, waiting to be deployed. If companies don't see good investment opportunities within their own businesses, or lack confidence in the economy to make those investments, one alternative is to increase payouts to shareholders.

Some companies, like Apple, are making headlines paying huge dividends. Apple paid out $2.8 billion in each of the last four quarters, for a total of over $11 billion. And the stock price has done well, too -- up 18 percent year to date, and a gain of more than 43 percent over the past 12 months.

In fact, for the last 16 quarters, dividends per share rose at double-digit rates, and each of the last four quarters gave investors a new record high in payment amounts, according to a new report written by Frank Holmes, CEO of U.S. Global Investors. (Go to to access the report.)

Holmes notes that 84 percent of the S&P 500 stocks pay dividends to shareholders. And he's forecasting that dividends per share will increase an additional 8.2 percent over the 12 months starting March, 2015. But these days, generous dividends are only a part of the income story for stocks.

Stock Buybacks

In addition to using their profits to pay dividends to shareholders, many companies have spent significant money repurchasing their stock. That benefits current shareholders not only by pushing prices upward (or at least providing a "floor" that keeps the stock price from falling). But it also means that earnings per share will rise, since the reported earnings are spread over fewer shares outstanding.

The U. S. Global Investors report notes that in April, $141 billion in stock buybacks were authorized -- the most ever in a single month, and an increase of 121 percent from April, 2014. At this pace, says the report, a record $1.2 trillion in buybacks could be reached by year end -- far above the all-time high of $863 billion set in 2007.

Yes, companies have a mixed record of investment success when it comes to stock buybacks, often purchasing shares at market peaks -- such as in 2007! So the current surge in stock buybacks could be considered a sign of an impending market top. But money moves markets.

Companies are signaling that they are not about to expand, build new plants, and create jobs. That means economic growth is likely to remain muted -- not a good scenario for stocks. However, for investors, these higher payouts are an incentive to buy and hold stocks -- and that is likely to push stocks higher.

This is a classic example of the free market at work. Paying corporate cash to shareholders is not necessarily a bad thing for the economy. While some shareholders might spend the payouts frivolously, others will use the capital to invest in new, growing companies using the latest technologies -- helping build the industries, and the jobs, of the future.

That's the big picture. But if you're just an ordinary investor wondering where the stock market will go next this should serve as a reminder that there are two sides to the investment coin: reward and risk. And that's The Savage Truth.

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