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By Samuel Lee | 09-18-2014 02:00 PM

Faber: Income Investors Shouldn't Overlook Buybacks

Given how expensive dividend stocks have become today, it's even more important for yield-seeking investors to also consider buybacks in order to maximize their returns, says Cambria's Mebane Faber.

Sam Lee: Hi, I'm Samuel Lee, a strategist with Morningstar.

I'm here at the Morningstar ETF Conference 2014. Joining me today is Mebane Faber of Cambria Investment Management. He is the chief investment officer and co-founder.

Thank you for being here.

Mebane Faber: Great to be here.

Lee: Over the past couple of years, you've launched a series of value-oriented ETFs. First, you started with the Shareholder Yield ETFs. Could you explain a bit about shareholder yield and why you think it's a new and useful addition to the market?

Faber: Our strategy for launching ETFs is, first, funds that we would want to invest in, and no copycat funds. We want the funds to either be different or better in some regard. Shareholder yield is a very noticeable omission in the ETF space. A vast amount of income funds focus on dividends. That's only part of what a company can do with its cash flows. They can also distribute the cash as buybacks. To only look at one or the other … if you're a dividend investor and ignoring buybacks, you're ignoring half of the way companies distribute their cash. And the same thing with buybacks; if you're only doing buybacks, you're ignoring half of what the dividend world is doing.

So historically, sorting companies' stocks based on what we call "shareholder yield"--or "net payout yield" the academics like to say--has done a much better job of performance than dividend yield alone.

We screen the companies for this high yield, so it ends up having roughly a high-teen return: a net buyback yield of around 6%-7%, a dividend yield maybe around 2%. But what you find is investors care more about the aggregate amount that's getting paid out, and they don't really care how you distribute it, but just the absolute amount that gets distributed to them as shareholders.

Lee: Historically dividend strategies have outperformed the broad market. And you're saying that net shareholder yield outperforms dividend strategy. Could you describe in the ballpark range what the historical returns have been?

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