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The market is in full panic mode.
The S&P 500 is down 18% year to date. The Nasdaq is down a staggering 27%. And even the Dow Jones — made up of the 30 most prominent publicly-traded companies — is in correction territory.
According to Bank of America, there’s one thing that might save the stock market in 2022: money that corporations can return to shareholders.
“The best hope for 2022 bulls lies in the ability of investors to dislodge the $7.1 trillion in idle U.S. corporate cash,” the bank writes in a note to investors.
Bank of America forecasts that share repurchases and dividends in the U.S. — currently at a 12-year low — will likely go up moving forward.
“We expect companies to face pressure to compete for shareholders by increasing dividends and buybacks due to low profit growth, declining productivity, and decreased prospects for profitable [capital expenditures].”
In order to take advantage of a potential payout increase, Bank of America suggests ETFs that focus on dividends, buybacks, and free cash flow.
Here’s a look a three to get you started.
Vanguard High Dividend Yield ETF (VYM)
A lot of companies pay dividends, but some are more generous than others.
If you want to invest in a portfolio of companies that are characterized by oversized payouts, consider the Vanguard High Dividend Yield ETF.
The fund takes a passive, full replication approach to track the performance of the FTSE High Dividend Yield Index. It holds 443 stocks, so it is well diversified.
The ETF’s top holdings include household names like Johnson & Johnson (JNJ) and Procter & Gamble (PG) — companies that have been paying increasing dividends for decades.
VYM also boasts a very low expense ratio of 0.06%.
Paying dividends isn’t the only way to return cash to investors. Companies can also repurchase their shares. When a company buys back its stock, it reduces the number of shares outstanding, allowing each remaining investor to own a larger portion of the business.
If you want to follow the buyback theme, look into the iShares U.S. Dividend and Buyback ETF.
The fund tracks the Morningstar US Dividend and Buyback Index, which consists of companies with a history of dividends and share repurchases. Its expense ratio is 0.25%.
Right now, DIVB holds 319 stocks, with its three top holdings being Apple (AAPL), Microsoft (MSFT), and Meta Platforms (FB). In 2021, Apple spent $88.3 billion on buybacks, Microsoft spent $29.2 billion, and Meta bought back $50.1 billion of its own shares.
Pacer US Cash Cows 100 ETF (COWZ)
Free cash flow represents the money a company generates after all expenses — including capital expenditures — are paid. If a company generates a lot of free cash flow, it’s typically in a good position to return cash to investors.
That’s why the Pacer US Cash Cows 100 ETF is a potentially timely opportunity.
The fund is based on the Pacer US Cash Cows 100 Index, which screens the Russell 1000 Index to arrive at 100 companies with the highest free cash flow yield. Currently, its top three holdings are Valero Energy (VLO), Dow (DOW), and Occidental Petroleum (OXY).
The index is reconstituted and rebalanced on a quarterly basis. COWZ has an expense ratio of 0.49%.
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