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The Stock Market's Hidden Source of Huge, Safe Yields

By Dan Ferris, editor, Extreme Value
Wednesday, September 10, 2014

Most investors don't realize it, but IBM is one of the highest-yielding stocks in America right now.
Last year, IBM paid investors a cash yield of about 11.1%. It'll likely pay a similar cash yield this year...
Although this yield is huge – and about the safest you'll earn in the market – it's hidden from most investors. You won't find IBM's big yield on a stock screener. You won't hear about it in the newspaper.
If you want to safely earn big returns in stocks, you should learn the secret behind IBM's huge yield. It can give you a big edge over ordinary investors...
Wall Street has a name for this secret. I'll tell it to you in a moment. But how the secret works is more important than its name. A simple pizza analogy will show you how.­
You're starving... and you can have one slice of pizza. Would you rather have a slice from a pizza that has been cut into 12 slices? Or would you rather have a slice from the same pizza that has been cut into just eight slices?
It's a no brainer.
The slices from the pizza cut into eight slices will be bigger than the slices from the pizza cut into 12 slices. All things being equal, fewer slices of something will give you more of that something.
It's the same with owning a business. When ownership of a business is cut into fewer slices, rather than more, each piece of ownership is worth more. You want to own bigger chunks of great businesses, rather than smaller chunks.
That's why this secret – called "buybacks" – can result in you earning 10%+yields from safe, stable businesses like IBM.
Great businesses reward their shareholders in two ways. One, with dividends. Two, with buybacks.
The first strategy – paying dividends – is pretty straightforward.
Cash dividends are usually paid quarterly, and they're good for two main reasons.
First, they provide you with a regular cash return on your investment. In fact, one study shows that investors earned 394% on stocks from 1991 to 2010, and that 43% of that return came from dividends. Forty-three percent is a huge chunk of return. If you're investing in stocks, you simply can't afford to ignore dividends.
The second way businesses reward shareholders is by buying back their own stock. This is when a business takes the cash it has earned and buys its own stock in the open market. This "retires" existing shares.
Why is this good for shareholders? Like I said a moment ago, when a company reduces its share count, it's like cutting a pie into eight slices instead of 12 slices. You're getting a much bigger piece of pie. Likewise, as the company's share count falls, each remaining share is worth more.
Share buybacks are also great from a tax standpoint.
You have to pay taxes on cash dividends... but you DON'T PAY TAXES when a company uses cash to buy back shares... even though a share repurchase makes your shares more valuable. In other words, a share repurchase is like a non-cash dividend that's not taxable until you sell your shares.
IBM – the blue-chip technology firm – is great at using both dividends and share buybacks to return capital to shareholders.
IBM started 2013 with a market cap of about $213.9 billion. During the year, it paid out $22.9 billion in dividends and share buybacks. That's a roughly 10.7% cash yield for the year, based on the market value at the start of the year.
IBM started out 2014 with a market cap of about $198 billion. In the first half of the year, it paid out $13.5 billion in dividends and share buybacks. That's a yield so far of about 6.8% on the year's starting market value. If it keeps up that pace, it'll easily pay out a total cash yield of roughly 13.6% for the year.
No, you can't immediately collect a buyback in cash, but it does make your shares more valuable... it still increases the value of your stock. And you'll get about 2.3% of it in quarterly cash dividends. The rest is like a non-cash dividend that's untaxable until you sell your shares.
If you want to make the biggest, safest gains over the long term, don't make the common mistake of looking at dividend yields in a vacuum. Dividends are important, but they don't provide a complete picture of how much cash a business is returning to shareholders.
If you want the complete picture of how much cash a business is returning to shareholders, factor in buybacks... and use that information to buy elite, high-yielding businesses like IBM.
Good investing,
Dan Ferris

Market Notes


One of the world's top performing stock markets has a great lesson to teach us...
In the DailyWealth office, we track the performance of more than 80 investment funds. Our list covers every major country, sector, and currency. Right now, the top performing major country fund of the past year is Spain.
You might be familiar with Spain's economic problems. Its banking sector was hammered during the 2008/2009 credit crisis. Unemployment is extremely high. Economic growth is non-existent.
Given these negatives, you might think Spanish stocks would be losers. But regular DailyWealth readers know you don't need fast economic growth to make money in stocks. It's much more important to buy stocks with low expectations. Expectations for Spain have been so low that the big Spanish stock fund is up 37% over the past year... which beats China, the U.S., Germany, Mexico, and just about every other country you can think of. Low expectations leads to high returns!

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