IB Net Payout Yields Model

Net Payout Yield Focus: BP (BP)

With the crazy market of the last year, it's been difficult to focus on the Net Payout Yield stocks in our portfolios. The Net Payout Yield is the combination of the payout from a dividend and any stock buyback divided by the market cap of a stock. A lot of mutual funds, ETFs, and advisors focus on the values of investing in dividends, but not many focus on companies that buyback stock. Stock buybacks are more efficient ways for increasing the value of your portfolio, but more people seem to like getting the cash directly even if its less tax efficient. While getting cash can be important to clients, the total return usually rules investment decisions and the Net Payout Yield has proven to be a much better investing philosophy. Unfortunately this last year has made it difficult to pick such companies with so many of them cutting back stock buybacks to conserve liquidity and many financials eliminating dividends.

One of the better investments in our Net Payout Yield portfolio has been BP with it's 6.5% yield. BP has one of the higher yields in the portfolio yet they've also historically bought back stock giving them a net yield that has topped 10%. One of the reasons to focus on BP today is because they made a huge find of over 3 billion barrels of oil in the Gulf of Mexico. BP has severely lacked in its exploration program of late and this is encouraging news. Not only will it add 1B barrels to its proven reserves, but this also leads to the possibility of more discoveries in the gulf area where they hold a bunch of leases.

In general though, this portfolio doesn't focus as much on the prospects of the company as much as we let the yields draw the picture for us. After all, companies the size of BP don't pay out 10% yields if they lack the cash and cash flow prospects of strong long term investments. Exxon (XOM) is another one of the options in this sector. In this case, their lack of exploration and the fact that we wanted more dividends in the portfolio led us to choose BP over XOM. XOM though has a tremendous yield of 11.4% with their 9% buyback and 2.4% dividend.

History has told us that these type of stocks typically out perform the market and dividend only paying companies. Luckily for us most people just focus on dividends so that gives us a leg up. BP will be one of the stocks heavily invested in dividend portfolios, but its overlooked for its total payback.


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