Today is Dividend Day.

The series where I teach you 5 things about dividend investing in less than 5 minutes.

1️⃣ We Love Dividends… But There’s More

Dividends are great! Who doesn’t love getting paid for holding strong companies?

But lately, U.S. companies are buying back their own shares at record levels.

In 2025, buybacks could top $1.1 trillion, led by big banks and tech firms.

They're another way companies return cash to shareholders.

2️⃣ FCF Fuels Dividends and Buybacks

Both dividends and buybacks start with free cash flow (FCF) - the money left after running the business and paying for new equipment or buildings.

Here’s the formula:
FCF = Operating Cash Flow – Capex.

When companies have lots of free cash flow, they can reward shareholders through dividends, buybacks, or both.

3️⃣ An Investing Quote

Warren Buffett has a great reminder for investors.

Most of our returns don’t come from trading all the time, they come from owning great businesses that keep earning more every year.

As profits grow, those companies reward us with dividends and buybacks.

Most of the time, the best thing to do is to just hold and let time do the work.

“When there is nothing to do, do nothing.”

— Warren Buffett

4️⃣ Not All Buybacks Are Equal

Buybacks can be great - they return cash to shareholders and can signal that a company’s stock is undervalued.

But not all buybacks are good.

Some companies use them to boost executive pay or make results look better in the short term.

The best companies use buybacks responsibly, when they have extra cash and their shares are a good value.

That’s when buybacks truly reward long-term investors like us.

This literature review from the CFA Institute Research Foundation looks at why companies buy back stock, and what happens when they do.

Click the picture for the full PDF.

5️⃣ Example of a Dividend Stock

Apple a great example of a company that pays dividends and buys back shares.

It keeps generating massive free cash flow from its iPhones, Macs, and services like the App Store and iCloud.

And it's returned billions to shareholders through steady dividends and huge buybacks every year.

Warren Buffett held Apple for years without touching it, letting the company keep earning, paying, and buying back stock.

That patience turned into incredible returns over time.

• Profit Margin: 24.3%
• Forward P/E: 33.2x
• Dividend Yield: 0.5%
• Payout Ratio: 15.3%

The chart shows both the Dividend growth and the Buybacks during the time Buffett has owned the company.

Apple reduced the number of shares by nearly 1/3 (!) between 2016 and today.

Source: Fiscal.ai

That’s it for today!

Thanks for reading Compounding Dividends!

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Used sources

• Interactive Brokers: Portfolio data and executing all transactions
• Fiscal.ai: Financial data

Disclaimer

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