The popularity of dividend-paying equities has grown tremendously as investors looking for ways to generate meaningful income in today’s low-interest world.

But Mebane Faber, a portfolio manager at Cambria Investment Management, argues that dividend yield, while important, is an insufficient reason for choosing an equity.

He endorses a concept called shareholder yield. In his book, “Shareholder Yield: A Better Approach to Dividend Investment,” Faber shows that companies with high shareholder yields outperform both the broad market indices and high dividend yield portfolios by substantial margins.

William Priest of Epoch Investment Partners coined the term shareholder yield in a paper in 2005 entitled “The Case for Shareholder Yield as a Dominant Driver of Future Equity Returns.” Priest pointed out the importance of looking at how companies allocate all of their cash instead of considering dividends alone.

What, exactly, is shareholder yield? It is the dividend yield added to the buyback yield. The dividend yield is the cash dividend payment divided by the stock price. The buyback yield is the reduction in the number of shares divided by the number of shares outstanding. If a company bought $50 million worth of its own stock and its market cap was $500 million, the buyback yield would be 10 percent.

Currently, Apple has a dividend yield of 2.3 percent. It has a buyback yield of 4.6 percent. So its total shareholder yield is 6.9 percent.

Why are dividends important?

In an article, “Dividends Are a Critical Component of Total Return,” Judith Sarayan and Michael Allison showed that dividends accounted for some 50 percent of a stock’s returns since the 1930s. Dividends are the ultimate sign of corporate strength because they show that the company’s board has not only direct interest in the shareholders — the ultimate owners of the business — but also the ability to pay out cash. Without the prospect of earnings to pay dividends, stocks are just worthless pieces of paper.

If a company not only pays a dividend, but buys back its stock, shareholders benefit in two ways. Stock repurchases increase shareholders’ percentage of ownership. If a company retires 50 percent of its stock, remaining shareholders have doubled their percentage ownership. Another advantage of buybacks is that the investor does not pay taxes when a company buys back its shares.

Keeping track of companies’ outstanding shares is difficult.

Companies can issue new shares and buy back existing shares, and they can issue shares to their employees and executives as an additional form of compensation or bonus. Businesses reduce the overall number of shares outstanding using share buybacks.

Let me give an example of shareholder yield.

A company spent $3 billion on dividends and $4 billion on share purchases. In addition, it issued $1 billion worth of shares. In this case, the total amount spent on dividends and net share repurchases was $6 billion. If the market capitalization of the company is $100 billion, then the shareholder yield is 6 percent.

Faber pointed out that there are five ways a company can spend their positive cash flow. They can:

Pay out a cash dividend.

Buy back their stock.

Pay down debt.

Reinvest in the business.

Acquire other companies.

The first two, which I define as shareholder yield, go directly into shareholders’ pockets.

In response to activist pressure led by Carl Icahn, Apple chief executive Tim Cook disclosed that the company had repurchased $40 billion of its stock over the past 12 months. This is a record for any company over a similar span, Cook pointed out.

According to many press reports, when Icahn began his campaign, Apple was trading at $468, Apple closed on Friday near $520.

Originally published in the Sarasota Herald-Tribune