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Dividends and Buybacks: These Firms Make the Cut

NEW YORK ( TheStreet) -- In a recent column I extolled the potential benefits offered by companies that are both paying dividends and buying back stock. Theoretically, neither action may make sense.

In the case of dividends, even at the low current dividend tax rates, the argument could be made that dividends are a waste of capital. Here's why: companies pay taxes on income then distribute a portion to shareholders, who in turn pay tax. Had the funds instead stayed with the company, less capital would have flowed to the government in the form of taxes paid by shareholders.

In the case of buybacks, the argument can be made that the company buying backs its shares must be out of productive ways to deploy its cash, that future growth opportunities must be limited. To a lesser extent, you could make a similar argument about dividends.

Of course, theory and practice quickly part ways, especially when it comes to investors, their behavior and attitudes toward having cash returned to them in the form of dividends. In my view, it's not just about the yield itself, but rather the growth in dividends. Unlike earnings, dividends can't lie. I like the confidence shown by management teams, those that are worth their salt and know what they are doing anyway, when they continue to increase the payouts.

In terms of share repurchases, when buyback programs are initially announced, the stock usually gets a boost. The problem here is that just because a company announces a buyback does not mean it will follow through. This can all be a head fake, and result in a loss of credibility for the company.

Putting it all together, I've screened for companies with the following attributes:
  • Minimum market cap: $2.5 billion
  • Increasing dividends for each of the past seven years
  • Minimum dividend yield of 2%
  • Decrease in shares outstanding of at least 5% in the past year.

That's a fairly stringent set of criteria, yet there were 19 names that made the grade.
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