Buyback ETFs Deliver Cash Without Dividends, Additional Taxes

Companies with idle cash have a potentially more profitable alternative to the traditional dividend as an income source —buyback fund PowerShares Buyback Achievers (AMEX:PKW) lets the exchange-traded funds (EFT) investor focus on this alternative technique.

In theory, economists say buying back stock is no different than issuing dividends even though it seems counterintuitive that repurchasing stock returns value to stockholders in a comparable way to dividends.

But, say the experts, when a company buys back shares from the open market, the shares are retired, leaving remaining stockholders owning a proportionately larger amount of the firm. This should translate into proportionately higher stock prices.

Here's another reason to buy back shares: tax efficiency. Since companies already pay tax for earnings before they decide what to do with the month, no further tax accrues for the company or investor if they opt to buy back stock.

On the flip side, if companies issue dividends, investors who receive them are immediately taxed at capital gains rates. So dividends wind up being taxed twice.

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So stock buy backs make sense in theory, but what about in practice? While research confirms they affect stock prices as expected, it also demonstrates the amount can vary among different industries during different times.

Inherent in the buyback strategy is management's view that the stock is cheap or at least reasonably valued, and many firms buy back opportunistically. Still, the experts say recent performance has been "stellar," especially when compared to the broad market.

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