Buybacks vs. Dividends – Which One Really Benefits You as an Investor?

Episode 7 of The Smarter Money Show explains the mechanics and psychology behind stock buybacks versus cash dividends. You’ll learn why companies choose one over the other, how each affects shareholder value, and what to watch out for when evaluating buyback programs. We also discuss tax efficiency, timing risk, earnings-per-share impact, and how Wall Street often misuses buybacks.

Whether you’re a passive investor or picking stocks yourself, this episode will sharpen how you evaluate capital return strategies. Understanding buybacks vs. dividends can give you an edge most retail investors miss.

Episode Transcript

Speaker 1 (00:00):
Before we begin, here's your standard reminder. This is not
financial advice. It's for educational and informational purposes only. Always
do your own research and consult with a licensed advisor
before making any investment decisions. Welcome back to the Smarter
Money Show. I'm your host, and this is episode seven.
Today we're talking about something that doesn't get nearly enough

(00:21):
attention but quietly plays a huge role in shareholder returns.
We're talking about buybacks versus dividends. Now, you've probably heard
the term buy back or share repurchase before. Maybe you've
seen headlines like Apple announces ninety billion dollars buy back
or company X returns cash to shareholders via dividends and buybacks.
But what does that actually mean for you as an investor?

(00:43):
Is one better than the other and how should you
think about it when evaluating a stock. Let's break it down.
When a company makes money, it has a few choices.
It can reinvest that money into the business R and D,
new products, hiring, expansion, that's growth. It can pay down
debt that improves the balance sheet, or it can return
the capital to shareholders. And when companies choose to return capital,

(01:05):
they typically do it in two ways dividends or buybacks.
A dividend is simple. It's a direct cash payment to shareholders.
If a company pays a one dollar per share dividend
and you own one hundred shares, you get one hundred
dollars in cash, usually quarterly. You can reinvest it or
spend it. It's tangible, it feels like a reward. That's
why many investors love dividends. They're visible, consistent, and create

(01:28):
a sense of stability. A buyback, on the other hand,
is less obvious. The company uses its cash to buy
back shares of its own stock from the open market.
This reduces the number of shares outstanding, and when there
are fewer shares, earnings per share go up even if
profits stay the same. That can support the stock price,
increase ownership concentration, and signal confidence from management. So which

(01:50):
is better. Let's start with the case for buybacks. First,
tax efficiency. In many countries, including the US, dividends are
taxed as income when received, even if you reinvest them,
but buybacks don't trigger taxes directly. They simply raise the
value of each remaining share. That's a win if you're
holding long term, and especially if you're in a taxable account.

(02:12):
Second flexibility, Dividends are sticky. Once a company starts paying one,
investors expect it to continue and grow. Cutting a dividend
is seen as a sign of weakness, but buybacks are optional.
Companies can ramp them up or scale them back depending
on cash flow, market conditions, or priorities without freaking out shareholders.

(02:32):
Third EPs boost Fewer shares means higher earnings per share,
which can drive stock price appreciation, especially if Wall Street
is focused on per share metrics. But buybacks have risks too.
First timing companies don't always buy backstock at the right time.
In fact, many buy aggressively when their stock is expensive

(02:53):
and pull back when it's cheap. That's the opposite of
what you want, so always look at valuation when assessing
a buyback. Is the company reducing shares at a fair
price or just trying to juice EPs. Second executive incentives.
A lot of management teams are paid in stock based compensation.
If they can boost earnings per share with buybacks, even

(03:13):
without improving the business, they get rewarded. That can create
misaligned incentives, especially if it's done at the expense of
long term investment. Third optics versus substance. A buyback sounds
shareholder friendly, but if the company is simultaneously issuing new
shares through stock options, grants, or acquisitions, the net effect
might be zero or even negative. So check the share

(03:35):
count over time is it actually decreasing? Now let's look
at dividends. The pros are clear. Cash in hand, transparency,
a steady income stream, especially useful in retirement, and a
culture of discipline. Dividend paying companies are often more mature,
more cautious, and less likely to chase risky growth. But
there are downsides too. First, tax drag. If you're in

(03:59):
a taxable account, that dividend is taxed, whether you wanted
it or not. Second, reduced flexibility for the company. Once
a dividend is on the books, cutting it looks bad,
so in downturns, companies might have to maintain payouts they
can't afford or risk a market freak out. Third opportunity cost.
Sometimes the company should be reinvesting in growth, not paying

(04:21):
out cash. If they're forcing a dividend just to satisfy investors,
they might be missing bigger, long term opportunities. So what's
the takeaway? Neither is better in every situation. It depends
on context. Buybacks makes sense when the stock is undervalued.
The company has excess cash and low debt. Management incentives
are aligned. Share account is consistently dropping over time. Dividends

(04:44):
make sense when you want consistent income you're in a
tax advantage account. The company has stable, predictable earnings. You
value transparency and discipline. If you're a long term investor,
both can be good, but for different reasons. Personally, I
like company copanies that do both responsibly. A modest growing
dividend paired with opportunistic buybacks can be a powerful combination.

(05:07):
It shows the company is mature and flexible, shareholder focused
and strategic, and as an investor, you should look beyond
the headline. If a company announces a ten billion dollars buyback,
don't just cheer. Ask questions, what's the timing, what's the valuation?
Is the share count going down? Are insiders selling at
the same time, same with dividends. Are they supported by

(05:29):
free cash flow? Are they growing over time or just
flat or worse unsustainable? In the end, capital return is
a signal, but the real value comes from what the
company does, not just what it says. And always remember
whether it's a buyback or dividend. It's your money. Don't
just take it at face value. Think about what it
means for your portfolio, your taxes, your strategy. This episode

(05:50):
wasn't about telling you which is better. It was about
helping you see both clearly and use that understanding to
make smarter investing decisions. And again, this is not financial advice.
Do your own research, know your goals, think long term.
If you like this episode, leave a quick rating and
follow the show. In our next episode, we'll dive into

(06:11):
how to survive a bear market, not with fear, but
with a real plan, because downturns are inevitable, but damage isn't.
Thanks for listening, Stay smart, stay patient, and stay invested.