Dividends vs. Buybacks in a High-Multiple Market

Which actually pay you—and when the “yield” is just marketing

Hey Wealth Building Family!

Let’s talk about a sacred cow.

(When to worship it, and when to slaughter it.)

I’m talking about stock buybacks.

They’re hot. In 2024, S&P companies set a record buying back $942.5 billion of their own stock?

Why?

It can return value to shareholders. The idea is that if the company buys some back there are then fewer in the hands of the owners. Therefore, the same earnings stream is split between fewer shares of ownership. So, that results in a higher P/E ratio.

It “returns value” to the shareholders.

Well… Let’s talk about that.

In a market where megacaps trade like luxury goods and any company that mentions “AI” is the latest darling, there’s a lot of volatility out there.

That’s exciting for “cowboy” traders looking to catch a ride on a hot stock. But what about the rest of us?

How can an investor count on a company sharing the wealth with shareholders, instead of just taking a shot on the stock shooting higher?

Well, companies have two main ways to “return capital” to shareholders: dividends and share buybacks.