How Successful Investors Get RICH

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The double power of dividends and share buybacks

The double power of dividends and share buybacks

Picking stocks whose share prices will rise is not the only goal that successful investors set for themselves. You also add a great deal of value to your portfolio when you select stocks that are prepared to distribute their profits to the shareholders.

A company can share the wealth in two main ways—it can buy back its own shares, or it can pay dividends. Both pay off for investors, which is why a number of the best stocks we recommend have a history of doing both.

Here are three ways in which you can benefit from those companies that reward their shareholders with both share buybacks and dividends:

  1. A company boosts its per-share profit by buying back its shares back, because profits get divided among fewer shares.
  2. Boosting per-share profits can also push up share prices. Plus, buybacks let you defer taxes on those capital gains. That’s because you only pay capital-gains taxes when you sell. What’s more, you’ll pay tax at half the rate on capital gains than you would on ordinary income. And you can offset capital gains with capital losses.
  3. Dividends have tax advantages. You’ll pay tax on dividends in the year you get them, if you hold the shares outside your RRSP. However, dividends on Canadian companies receive favourable tax treatment in Canada, thanks to the dividend tax credit.

Below are examples of two companies that have recently increased value for their shareholders.

How Successful Investors Get RICH

Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor.

How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.

Hedge fund helps increase value for Agrium shareholders

In October 2012 Canadian fertilizer maker and agricultural goods retailer Agrium Inc. (Toronto symbol AGU) announced that it was spending $900 million to buy back 6% of its shares.

At the same time, Agrium pledged to double its dividend to $2 a share on an annualized basis and move from a semiannual to a quarterly payout as of January 2013. The higher dividend now yields 1.76%.

These moves were partly due to pressure from its largest shareholder, hedge fund Jana Partners LLC, which has been pushing the company to explore options to boost shareholder value. What’s more, Jana feels that Agrium could unlock as much as $50 a share of value if it were to spin off its retail business.

Canadian National Railway Co. (Toronto symbol CNR) also launched a program of buybacks in the fall of 2012. The company plans to buy back up to 18 million of its common shares, or roughly 4% of the total outstanding, by October 28, 2013. As well, it aims to repurchase up to 5.8 million of its shares from a private seller at a discount to the market price.

These initiatives will raise earnings per share and give the remaining shareholders a larger stake in the company.

And last week CN rewarded its shareholders again with a 15% increase in its quarterly dividend, to be paid on March 28, 2013 to shareholders of record on March 7, 2013. That will make the annual dividend rate $1.72; it currently yields 1.8%.

If you stick with our long-standing advice of investing mainly in well-established, dividend-paying companies with strong business prospects (like those we recommend in The Successful Investor), you will automatically earn regular dividend income. And you will also have an excellent chance of benefiting from companies that buy back their shares regularly.

Plus, the fact that these companies have strong positions in healthy industries makes it more likely that they will buy back shares on a regular basis, and raise their dividends.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow members

Has the fact that a company raised its dividend ever been the catalyst that prompted you to buy a stock? Has a company’s willingness to buy back its shares ever influenced your decision to buy a stock? In either case, did the stock meet your expectations?


  • Richard 

    Agrium’s increase in stock price as well as dividend are one of the main reasons why I hold this stock. I wish they would do a stock split so I could purchase more.

  • I believe that share buybacks can be easily misused by management. Shares should only be bought if they are reasonably priced, that is only if the share price is depressed. Otherwise, the money should be given to the shareholder so they can buy something else at a reasonable price. Also, there is evidence in the last few years that the purchasing of shares does not lead to an increase in the price of shares for the remaining shareholders

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