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Are You Looking at Dividends All Wrong?

I don’t have to remind the average income investor why it’s great to focus on dividend-paying stocks. The proof comes every quarter when dividends are deposited in your account.

There are a million different variations of dividend investing. Some care about nothing more than the current yield. Others want only to put their money to work in a company with a demonstrated history of hiking the payout. Some employ an alternate strategy, buying stocks with low payout ratios and good growth potential.

These are all fine plans, but there’s one that doesn’t even get a second thought from most investors, which is too bad, since it’s an investing methodology that has been proven to outperform over the long term.

It’s simple. Instead of looking for dividend yield, look for something called shareholder yield. Find it and excess returns will surely follow.

What is shareholder yield?

Shareholder yield is as simple as it is powerful. Instead of looking at just a dividend yield, look for dividend yield plus share buybacks.

Share buybacks don’t get nearly the credit they deserve. Not only do they show that management is committed to giving back to the company’s owners, but they can also do a nice job boosting the bottom line.

Look at it this way.

If a company has a million shares outstanding and they earn $1 million in profits, that’s $1 per share. If they buy back 100,000 shares and maintain the same profit, net income per share increases to $1.11 per share. And if earnings go up to $1.1 million, earnings really start taking off, hitting $1.22 per share.

Share buybacks also make dividends more secure. If a company pays out 50% of their earnings and then uses the other 50% of earnings to buy back shares, the payout ratio automatically dips.

Here are three Canadian stocks with huge shareholder yields.

Telus

Telus Corporation (TSX:T)(NYSE:TU) not only pays an attractive 4.5% yield, but it’s also been aggressively cannibalizing its own shares.

Since the end of 2012, Telus has repurchased more than 64 million shares for a total reduction of just under 10% — not bad for a company that also pays out such a nice dividend.

In the last year, Telus has repurchased approximately 2% of its outstanding shares. Add on the 4.5% yield, and Telus investors are getting a 6.5% shareholder’s yield. No other Canadian telecom can boast that.

Aimia

One of the reasons why I purchased Aimia Inc. (TSX:AIM) in late 2016 was because of the company’s huge share repurchases. In 2015 and 2016, it repurchased more than 19 million shares, which was about 11% of total shares outstanding.

Add in the company’s 9.1% current yield, and we get a huge shareholder’s yield of more than 14%. That should be enough to get almost any investor excited.

Genworth 

Many investors won’t touch Genworth MI Canada Inc. (TSX:MIC) because of its proximity to Canada’s real estate market. If Toronto or Vancouver real estate starts falling, Genworth could very well get hurt.

That fear hasn’t stopped Genworth’s management from paying a very attractive dividend. The current payout is 5.3%, and the company has raised dividends each year since first issuing shares on the TSX in 2009.

Genworth has also been steadily buying back its own shares. It had 98.8 million shares outstanding at the end of 2012. It has just 91.8 million shares outstanding today. That’s a 7% reduction in four years, or close to 2% a year.

Add that to Genworth’s dividend, and we get a shareholder yield of 7.3%. That’s not bad at all.

The bottom line

Dividends are important. Every investor knows that. But share buybacks can also play a huge role in giving back to shareholders. It’s time for investors to start paying more attention to buybacks. Your wallet will thank you.

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Fool contributor Nelson Smith owns shares of GROUPE AEROPLAN INC.

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