Thursday, October 14, 2010

Stock Buy Backs or Dividends, Which Is Better?

Companies often buy back stock and claim that it benefits shareholders. What you are not told is that companies often buy back shares with borrowed funds or are simply buying back shares to offset stock options exercised by employees.

Simple math tells us that if there are less shares and the same level of earnings, then earnings per share go up. Unfortunately, the value of a company is not determined by the number of shares outstanding, it is determined by how much a company actually earns. A company with only one share that is earning nothing will be worth $0. Just ask the shareholders of Enron, Lehman Brothers and Bear Stearns if share buy backs helped the value of their investment!

Dividends on the other hand are ACTUAL cash that is returned to the investor.

That is why I like to invest in high quality dividend paying stocks or Paid To Wait Stocks, as we like to call them here at WFG.

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