Did you watch the State of the Union address? I tuned in briefly, long enough to catch some of the President’s comments on infrastructure spending, tax policy, and the debt ceiling. These are all certainly areas where politics and investing intersect.

As you know, we try to stay above the fray and avoid taking partisan stances on most issues – unless they directly impact your portfolio. Well, one hotly debated topic is of particular interest to investors like you and me. When it comes to stock buybacks, the White House has declared war on corporate America.

It fired the first shot last year, imposing a 1% excise tax on stock buyback expenditures as part of the Inflation Reduction Act. Now, Biden is advocating a quadrupling of that tax to 4%.

It’s no secret that Democrats generally loathe stock buybacks. Many have openly expressed their disdain for the practice. Senate Majority leader Chuck Schumer was blunt in saying, “They’re despicable. I’d like to abolish them.”

No need to read between the lines there.

The argument against buybacks usually goes like this. If a business has enough surplus cash to repurchase shares, it should pay employees more or invest in new projects. Opponents contend that buybacks manipulate stock prices and do little but line the pockets of rich executives and billionaire financial backers.

Sure, CEOs benefit. But so do teachers, truck drivers, and countless other workers from all walks of life.

The Case For Buybacks

Buybacks are a common method of returning capital to stockholders – like dividends, but more tax efficient. It’s impossible to quantify and put an exact number on it, but most agree that buybacks have played a supporting role in the S&Ps powerful 225% advance over the past decade.

These cumulative capital returns enrich not just the billionaire class (an easy target) but also you, me, and 150 million other Americans who own shares in U.S. companies. About 60% of American adults have a stake in the market. That’s either directly or through mutual funds and ETFs via a retirement account. The average family holds approximately $40,000 in stock (perhaps a bit less after last year’s decline).

Now, I don’t always agree with buybacks either – but for a completely different reason: valuation. When companies overpay and repurchase stock for more than its intrinsic value, shareholder value is destroyed, not created. There is little financial sense in purchasing dollar bills for $1.10, although doing so may temporarily prop up stock prices in the short term.

But if done for the right reasons at the right price, then I fully agree with Warren Buffett, who deems them “by far the most attractive option for capital utilization.” Buffett harps on the importance of capital allocation and understands that there are often multiple value-enhancing uses of retained earnings. When businesses have availed other channels, then “enlarging the interests of all owners” is the surest path.

We don’t need to get into the actual mechanics of how they work (something many politicians fail to grasp). Just know that CFOs, paid well to make smart financial decisions with company cash, are almost united in agreement that buybacks are an effective lever to pull. Sometimes, the best place for a high-return business to invest is in itself.

That’s why the 1% tax hasn’t been much of a deterrent. S&P 500 companies set aside $221 billion for stock buybacks last quarter. And Bloomberg reports that repurchase authorizations spiked to $132 billion in the first month of 2023 alone, triple last year’s starting pace.

Apple is a poster child, pouring $20 billion into stock buybacks last quarter and $90 billion for the year. That didn’t come at the expense of anything else. The tech giant still sunk $10 billion into new plants and equipment, shelled out $15 billion in dividends, and invested $25 billion into research and development to maintain its competitive edge. It also made acquisitions to expand into new arenas, such as music-based artificial intelligence.

When you haul in $120 billion in yearly operating profits (with a mountain of cash on the books), you can spread it around. These activities don’t just benefit Tim Cook, but most of the firm’s 164,000 rank-and-file workers and millions of individual stockholders across the country.

Of course, that’s just one example. Credit Suisse has crunched some numbers and determined that buybacks added 3.7% to S&P 500 earnings last quarter, a sizeable contribution. And the S&P buyback index (which tracks stocks with the highest buyback ratios) has gained 8.1% thus far in 2023, outrunning the S&P’s 6.3%.

But that’s not really the issue.

Keep An Eye On Capitol Hill…

Returns aside, this wealth-building practice is being demonized, and there is a growing movement to discourage it with prejudice. It’s unclear whether the tax proposals being bandied about are net or gross. That’s a big difference. You may have noticed that many companies that repurchase stock still seem to have a stable (or even growing) share count. That’s because they might retire 4 shares with one hand and print 5 new ones with the other.

This is particularly common in the tech sector, where stock options are a favored form of employee compensation. Repurchases are often meant to offset the dilution. If a company spends $100 million on gross buybacks and issues $90 million in new shares, then the net repurchase is only $10 million. Either way, a survey of executives revealed that a tax increase to 2% or more would start to have a real impact.

This tax is unlikely to make any legislative headway in the House. And even if it does become law, companies will likely respond by channeling more cash into dividends. But then again, the White House has already proposed a doubling of dividend and capital gains taxes for upper-income taxpayers.

All of which is to say this: keep an eye on Capitol Hill. In the meantime…

There’s nothing quite like the feeling of collecting a dividend. But what if you could get paid monthly?

Monthly dividend payers do exist… You just have to know where to look.

In fact, my team and I have prepared a full presentation about monthly payers. You’ll learn everything you need to know, including how to get your hands on the names of my favorites. If you’re looking to bolster your income in 2023, I can’t think of a better place to start your search.

Go here now to learn more.