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Companies that put cash in their investors’ pockets beat the market consistently over time. And there’s one specific “payout loophole” that can be particularly profitable when done properly.

Today, firms have lots of cash to share. As of the end of the second quarter, corporate America was sitting on $1.43 trillion, up 5.5% from a year earlier.

That’s despite the fact that management is doing its best to shovel greenbacks out the door and back to investors. According to Goldman Sachs Group (GS), total spending on dividends and share buybacks will leap 7% in 2016, to just over $1 trillion.

Many first-level investors complain that CEOs should be reinvesting in their companies instead, but they’re doing fine on that front, too: Goldman sees R&D spending rising 5% next year, while capex will gain 6% (excluding the beaten-down energy sector).… Read more

Every time Warren Buffett issues his annual shareholder letter, investors ask:

“Will Berkshire Hathaway (BRK.A, BRK.B) ever pay a dividend?”

Uncle Warren’s answer is always the same: Berkshire shareholders are better served when the company’s immense riches (it ended Q3 with upwards of $66 billion in cash) are plowed back into the business.

Still, you shouldn’t take that to mean the Oracle of Omaha is against putting cash in shareholders’ pockets. He just he prefers another way of doing it: through share buybacks.

But here too, there’s a caveat. To keep from overpaying (a key buyback risk we’ll talk about in a moment), Berkshire will only repurchase its stock when it’s trading below 120% of book value.… Read more

Many first-level investors hear “defense stocks” and immediately start worrying about budget cuts.

But the two aren’t actually as connected as they think. And they’ve missed out on triple-digit gains as a result.

Despite the endless talk of reining in military spending on Capitol Hill, the defense business is booming.. Just look at how the sector’s top stocks have performed.

Let’s say, for example, you bailed out of Northrop Grumman Corp. (NOC) on December 1, 2012, at the height of the fiscal cliff debate. You’d have missed out on 183% stock-price gains, along with dividend hikes averaging 15.2% a year.… Read more

High yield bonds are starting to wobble a bit. The average Morningstar-rated fund is down 1.8% over the last three months, while the S&P U.S. High Yield Corporate Bond Index is down 1.3% over the same time period. For most “junk bond” investors, these principal losses wiped out their entire quarter’s worth of yield, and then some.

The credit markets can flip from dangerous to disastrous in a hurry. From May to December 2008, the S&P U.S. High Yield Corporate Bond Index plummeted 32% in just six months. A 6% annual yield doesn’t buffer a drop like that.

And whether a collapse is imminent or not, you can be sure it’s only a matter of time – be it quarters, or years – because that’s just what credit markets do every so often.… Read more

Many investors are almost addicted to the dividends that drug stocks pay. It’s easy to see why: Pfizer (PFE), Johnson & Johnson (JNJ) and Merck & Co. (MRK) all pay a secure 3%, thanks to the profits they reap from their pills.

But today’s dividends are merely a product of today’s cash flow. If you’re interested in the best long-term returns tomorrow and beyond, you need to dig deeper. Which is why my second-level assessment of any drug company starts with its R&D pipeline.

Few can boast bigger homeruns in that area than Gilead Sciences, Inc. (GILD). In December 2013, the FDA greenlighted its Sovaldi hepatitis C treatment.… Read more