Putting Excess Cash to Work

With the Fed keeping interest rates artificially pinned to the floor, income-oriented investors have been forced out of traditional investments, like bonds, in search of higher-yielding vehicles. Dividend-paying stocks are a natural place to look.

However, the herd-like move into these investments has bid up the price of many stocks simply because they pay a fat dividend. That could be the recipe for disaster if investors are buying indiscriminately.

The same can be said for investing in companies that employ stock buybacks. As Rodney points out, some companies buy back their own stock for good reasons… others, not so much.

The ability to pay for stock buybacks with cash, rather than newly acquired debt, is the key difference. And it’s this variable that Trim Tabs seeks to exploit as it chooses companies to buy for its ETF.

To that point, here’s a chart — taken from a Trim Tabs white paper — that shows the fundamental basis of this strategy. Namely, companies have generated far more free cash flow than they’ve paid out in dividends. Take a look…

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Companies could easily returnrn that excess free cash flow to shareholders in the form of dividend payments. But they’re not doing that. Instead, companies are using the cash to fund stock buybacks.

Here’s another chart, showing companies’ preference for stock buybacks over dividend payments.

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Don’t miss the opportunity to profit from this growing trend of share buybacks. And if you’re not comfortable investigating each and every company or stock — sifting out the winners from the losers — consider buying the Trim Tabs Float Shrink ETF (NYSE: TTFS), which is professionally managed and provides immediate diversification.