ASX blue chips set to unleash buybacks and dividends! But which is better?

Dividends and buybacks… Which is better for the discerning ASX investor?

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

asx blue chip shares represented by pile of blue casino chips in front of bar graph

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX investors love a good dividend, that much is certain. With Australia's unique system of franking credits now entrenched, the benefits of owning dividend paying shares are well known. That might be why some of the most popular ASX shares in the average investors' portfolio are big, dividend paying blue chips like the ASX banks, BHP Group Ltd (ASX: BHP), Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW).

Dividends are returning to the ASX

As most ASX investors would know, 2020 was an absolutely disastrous year for ASX dividends. Last year saw the ASX banks slash their payouts by more than 50%, with Westpac Banking Corp (ASX: WBC) failing to pay a bi-annual dividend for the first time in decades.

But 2021 has seen dividends return, and dramatically so. We're only half way through the calendar year, but already there are strong signs that ASX 200 dividends are returning to levels ASX investors were used to. But alongside the prospect of increasing dividends, another form of capital return has been growing in discussion, that of share buybacks. Telstra's recent sale of half of its mobile towers business is one such example. In its market announcement detailing this sale, Telstra CEO Andy Penn said the following:

We then expect to return 50 per cent of net proceeds to shareholders. We anticipate providing further details about the manner in which we will return those proceeds, including a potential share buy-back in FY22, at our full-year results in August.

Buybacks as well?

Further, we also recently discussed the prospects of share buybacks for the ASX banks. The banks' boards are also considering returning excess capital to shareholders. They might do this with a combination of dividends and buybacks. But, with all of this 'floating' going on, investors in these companies might be wondering: which is preferable? Well, that's a good question.

We probably all know how a dividend works, but here's a quick refresher. A dividend is a cash payment made by a company to its shareholders. As we touched on before, many ASX shares' dividends also come with franking credits. These credits further enhance shareholder returns by essentially attaching a tax deduction to the dividends, which investors can use to offset other taxable income. Or else claim as a cash refund. For most people, dividend income is assessed as normal income on your tax return.

A share buyback works in a completely different way though. Instead of sending cash out the door as a dividend, a company instead uses the cash to 'buy back' its own shares on the share market. This obviously reduces the number of shares in circulation, which gives existing shareholders increased ownership of the company. All other things being equal, this buyback will increase the earnings per share (EPS) of the company, seeing as earnings (and potential dividends) are divided between fewer shares.

As such, a share buyback will normally result in a proportionate increase in the price of each share (under the laws of supply and demand, less supply means higher prices). As such, a share buyback also benefits existing shareholders.

But which is better?

But share buybacks have a distinct advantage here. They increase the wealth (at least on paper) of existing investors, without increasing said investors' tax liability. The same can't be said of a dividend. It's for this reason that the legendary investor Warren Buffett has always preferred to give his investors a share buyback rather than a dividend. Indeed, Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B) hasn't even paid a dividend since the 1960s. But then again, some investors would be happier with cash in their pocket.

So long story short, when it comes to dividends and buybacks, the investor wins either way. These two mechanisms just take different roads to get there.

Motley Fool contributor Sebastian Bowen owns shares of Telstra Corporation Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Dividend Investing

A man in a business shirt and tie takes a wide leap over a large steel trap with jagged teeth.
Bank Shares

5.75% yield: Are ANZ shares a dividend trap?

ANZ's dividend currently beats out its own term deposits.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

Here are 3 buy-rated ASX dividend stocks to beat falling interest rates

Brokers are recommending these stocks to clients.

Read more »

Senior man wearing glasses and a leather jacket works on his laptop in a cafe.
Dividend Investing

Overinvested in BHP shares? Here are two alternative ASX dividend stocks

There are other businesses worth owning for passive income.

Read more »

Happy young couple saving money in piggy bank.
Dividend Investing

3 strong ASX dividend shares to buy instead of CBA

Analysts think these are better options than Australia's largest bank.

Read more »

Male hands holding Australian dollar banknotes, symbolising dividends.
Dividend Investing

Why I'd buy ASX dividend shares now before it's too late

This could be the right time to look at ASX dividend stocks.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
Dividend Investing

Beat low interest rates with these ASX dividend shares

As expected, on Tuesday the Reserve Bank of Australia elected to cut the cash rate once again. And with interest…

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Dividend Investing

Dividends from ASX 200 bank shares 'looking very stretched': expert

The banks have always been a favourite choice among ASX dividend investors. But the outlook ain't great.

Read more »

An executive in a suit smooths his hair and laughs as he looks at his laptop feeling surprised and delighted.
Dividend Investing

The best ASX dividend stocks to buy right now

Brokers think these stocks are top picks for income investors right now.

Read more »