UPDATED: April 2022
Is Share Buyback Better for You As An Investor or Dividend Payment? – There are two main ways companies can return spare cash to shareholders. One’s through a share buyback, and the other one is as a dividend.
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However, what are those two things, what’s the difference, and more importantly, what do they mean for you as an investor? Below, we cover all of these topics to break down the jargon and get to the heart of what buybacks and dividends mean for you.
What Are Dividends?
So, the question is: What Are Dividends? Dividends are cash payments to shareholders. “Ordinary” dividends are usually paid twice a year, after interim and final results. That means shareholders should get a steady source of income. Because dividends are at a manager’s discretion, they’re not guaranteed and can vary in size.
How Do Dividends Affect You?
If you’re looking to use dividend payments as an income, you might want to look at a company’s dividend yield. The yield is the annual dividend payment as a percentage of its current share price. So, How Do Dividends Affect You? Well, if a company’s share price is 100p, and it has paid a dividend of 6p in the past year, the dividend yield is 6%. Yields are usually calculated using last year’s dividend. This means they aren’t a reliable guide to the income you’ll get in the future, as there’s no guarantee last year’s payment will be repeated this year.
As an investor, dividends provide flexibility in that you can choose what you do with the cash. You could:
- Reinvest to buy more shares in the company
- Buy shares in another company
- Use it as an income
You’re taxed on dividends when you hold shares outside an ISA and a SIPP, so receiving a higher payment and then reinvesting it back into the company might not be in your best interests. Remember, tax rules can change, and benefits depend on your individual circumstances.
A share buyback is when a company uses its extra cash to buy its own shares and usually cancels them.
A buyback means you’ll own the same number of shares, but because there are fewer shares in existence, the value of your shares should rise, all else being equal. You’ve got a bigger slice of the same pie. Remember, all investments can fall as well as rise, so investors might get less back than they invest.
Ideally, a share buyback will take place when the company’s management thinks the shares are undervalued. This is one half of the basic “buy low, sell high” mantra. If the company plays its cards right, this can be great for investors. A well-executed share buyback can save shareholders having to pick the right time to reinvest a dividend payment. However, there’s always the chance of the management buying back the shares at the wrong time. Generally, share buybacks can:
- Give a positive signal that the company thinks its shares are worth more than they’re trading at but remember this won’t always be the case.
- Increase the value of existing shares.
- Cut out the middle man. If you reinvest your dividends, a share buyback does it for you, saving you dealing charges.
A company is under no obligation as far as share buybacks go. In most cases, it can stop repurchasing shares whenever it wants. They aren’t committed to dividend payments either, but the management will typically think about stopping a buyback before cutting the dividend.
There’s no clear winner in the buybacks vs. dividends debate, as both are good news for investors. However, it’s important to remember their differences. The key takeaway is that dividends are better for income, while buybacks are more geared towards capital growth. Whatever your circumstances, understanding the differences means you can choose what’s right for your investment goals.
About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .
Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept: Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:
LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)
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