Why Low Dividend Yields Are Actually Good News for Investors Seeking Income

US stock dividend yields are now extremely low. The Securities and Exchange dividend yield of the US stock market is now about 1% annually. I happen to think that’s a wonderful thing, as it’s now easier to build a far more tax-efficient 2.5% income portfolio. Before explaining how, I’ll explain it with one stock using a simplified example.

Two Ways to Return Cash to Shareholders

Let’s say you own 1,000 shares of ABC, which has 100,000 shares outstanding. You bought it at $10 a share, and it’s now worth $13. Thus, you own 1% of the company, which now has a total market capitalization of $1.3 million, and your 1% is worth $13,000.0. Let’s assume ABC has $26,000 in cash that it wants to return to the shareholders and is considering two options: Pay it as a dividend of $0.26 a share or use the cash to buy back 2,000 shares.

If ABC pays a dividend, you will receive $260 taxed at a federal rate of 15%. After paying the $39.0 in taxes, you are left with $221.0 and, all other things being equal, the stock price would drop by $0.26 and be worth $12.74 a share. You still own 1% of the company—1,000 of the total 100,000 shares.

The other way to return the cash is to buy back 2,000 shares with the $26,000. You could opt to sell 2% of your shares (to anyone) and receive $260 for the 20 shares. Your gain is only $60 and, assuming you have owned ABC for over a year, you are taxed at a 15% long-term capital gains rate. You pay only $9 in taxes and are left with $251, or an extra $30 than if it had been paid as a dividend.

Now you own 980 shares of the 98,000 shares ABC still has outstanding—that’s the same 1%. But the tax bite is far less. Bottom line, you should prefer the stock buyback versus the dividend.

Back to Reality

Aswath Damodaran, a finance professor at NYU Stern School of Business, has done quite a bit of research on buybacks, which he shares on LinkedIn. He writes, “While buying back stock has always been an option available to US companies, its use as a systematic way of returning cash picked up in the 1980s, and in the years since, stock buybacks have become the dominant approach to returning cash for US companies.”

Damodaran also dispels many of the myths critical of stock buybacks.

In the past 15 years or so, it became widely understood that buybacks were better for shareholders because they were more tax-efficient than dividends. Suddenly, more cash was being returned from buybacks than dividends. Share dilution disappeared as stock buybacks were slightly greater than new shares issued. The exhibit below shows more cash has been returned to shareholders from buybacks than from dividends.

Shareholder Payouts $Billion

While the payouts from both dividends and buybacks have increased, the market value of underlying stocks surged at a faster rate, so yields have declined. Nonetheless, total yields were roughly 2.5% in 2025 with more coming from buybacks than dividends. Stock buybacks are increasing despite a 1% excise tax that was enacted in 2022.

Shareholder Yields (%)

The Simple Diversified Tax-Efficient Income Fund

One might conclude that buying stocks that return more cash to investors through both dividends and stock buybacks might be the way to go. IShares Core Dividend ETF DIVB

, for example, follows the Morningstar US Dividend and Buyback Index. The index selects high-yielding stocks from both dividends and buybacks. It weighs dividends at 75.0% and buybacks at 25.0% and yields about 2.7%. But the index is heavily weighted in mid-cap value stocks. I believe in maximizing diversification, as I don’t know which part of the market will outperform in the future.

A better solution would be buying a total US stock index fund, such as Vanguard Morningstar Total Stock Index ETF VTI

. Its current dividend yield is about 1.03%, and if 1.3% of all outstanding shares of US stocks are repurchased, then the total cash yield would be about 2.33%. It’s a bit less than the yield in 2025 because stocks have continued to appreciate. The simple solution is merely to collect the 1.03% dividend and sell 1.3% of the Vanguard Morningstar Total Stock Index ETF. Mathematically, it’s the same as if the underlying companies paid a 2.33% dividend and bought back none of their shares. In other words, selling 1.33% of a total stock market index fund would approximate holding the same percentage of the US stock market as if it paid the full 2.33% in dividends and you sold nothing. You just pay far less in taxes, as selling some of your Vanguard Morningstar Total Stock Index ETF incurs taxes only on the gain. (Make sure you have held the fund for more than a year, so you don’t pay a higher short-term capital gains tax rate.)

A Better Income Portfolio

You can see from the exhibits that stock buybacks are less stable than dividends. That’s because the market will punish a company far more severely if it slashes its dividend rate than if it reduces its buybacks. So, there is a bit more risk in counting on buybacks to continue.

Buybacks are no better or worse for society than dividends, and both should be done with free cash flow rather than borrowing. Buybacks just result in more tax-efficiency for the shareholders. While I’m more than a bit concerned about the $40 trillion national debt, I suspect we all still want tax efficiency in our portfolio. Use buybacks to build a better income portfolio.

Author’s note: My thanks to Morningstar’s Dan Lefkovitz for both insights and data for this piece.