MW How Nvidia, Meta Platforms, Alphabet and other tech stocks will pay you cash
By Michael Brush
These 15 growing, dividend-paying tech stocks offer you the best of two worlds
Dividends aren't just for utilities and grandpa anymore - Big Tech has joined in.
So far this year, Meta Platforms Inc. (META), Alphabet Inc. $(GOOGL)$ $(GOOG)$ and Salesforce Inc. $(CRM)$ have each begun to pay quarterly dividends, while Nvidia Corp. $(NVDA)$ raised its dividend by 150%.
Many investors are wondering why. "A lot of people invest in tech stocks for the growth and the sexiness, and they haven't done it from an income perspective," said Kieran Kirwan, senior investment strategist at ProShares, which offers ProShares S&P Technology Aristocrats exchange-traded fund TDV.
Tech companies paying dividends does raise some troubling questions. Are the payouts a sign that growth is over? Do they tell us management has run out of good investing ideas? Should we even care about these dividends because the yields are low?
Kirwan and three other dividend-investing experts offered perspective about what tech-stock dividends tell us about these companies and yield investing in general. Here are three myths you should reject.
1. Dump the stock because the dividend means the glory days are over
Real growth companies don't pay dividends, goes this line of reasoning. This myth seems to be confirmed by the underperformance of companies paying dividends this year, and even over the past 10 years.
But this is shortsighted. "Meta and Google paying dividends is an indication they are reaching a size where growth is starting to mature," conceded Randy Hare. director of research at Huntington National Bank, which owns several dividend-paying tech names. "But it doesn't happen overnight. It is a multiyear transition."
Consider Microsoft Corp. $(MSFT)$ and Apple Inc. $(AAPL)$, said John Buckingham of the Prudent Speculator, who invests for yield as well as capital appreciation. Since Microsoft launched its dividend in January 2003, it has posted annualized returns of 16%, compared to 10.8% for the S&P 500 SPX. Meanwhile, Apple's annualized return is 23.2% since it paid its first dividend in July 2012, versus 14.6% for the S&P 500.
"Paying a dividend does not mean there can't be growth," Buckingham noted. "I'd rather see companies return some capital to investors and still invest in their business. They can do it all."
Dividend payers in general boast an impressive long-term record. From 1927 to 2023, dividend-paying U.S. stocks posted annualized gains of 10.3% - compared to 8.7% for nondividend names and 9.7% for the market overall - with lower volatility, according to investment-research firm Morningstar.
This outperformance makes sense because nondividend companies are often more speculative, while dividend payers tend to be established, steadier companies that also have a more loyal shareholder base.
2. Dividends reflect poorly on managers, who should know how to invest for greater returns
The opposite is true. Giving money to shareholders reduces cash positions, which can help prevent managers from making dumb mistakes.
Apple offers a good example of how piles of cash can tempt company executives, according to Hare. "They invested a lot of money in autonomous driving, and investors gave them the benefit of the doubt," he said. "But that investment gave them no returns and they shut down the business."
Buckingham offers a similar example in Meta's metaverse investments, which so far have not paid off. In truth, committing to a dividend instills discipline.
3. The tech dividends are so low, they don't really matter
Meta, Alphabet and Salesforce dividend yields are all less than 1%. That is low - but the yield on the Morningstar U.S. Market Index recently was less than 1.5%. Besides, there are three important angles to keep in mind.
First, since these are tech companies with solid growth, they're likely to keep raising their dividends. Second, launching a dividend is an important statement about a company's prospects. "It is probably the strongest signal a company can send that they are confident in the future," Kirwan said, because cutting a dividend can lead to investor doubts and selling pressure.
Third, dividends are preferable to share buybacks. True, buybacks appear better because dividends are taxed. But dividends make a stock attractive to a broader pool of investors, noted Will Muggia, chief executive of Westfield Capital Management, who added that companies also often flub buybacks. "We have seen a lot of value destruction with poorly timed stock buybacks by many tech companies," Muggia said.
Some favored dividend payers in tech
Since tech companies paying dividends can be a winning combination, here are several to consider.
Kirwan chooses consistent dividend growers for the three ETFs he manages: ProShares S&P Technology Dividend Aristocrats ETF; ProShares S&P 500 Dividend Aristocrats NOBL, and ProShares S&P MidCap 400 Dividend Aristocrats REGL.
Kirwan singled out Jack Henry & Associates Inc. $(JKHY)$, which sells processing software to regional banks, and Badger Meter Inc. (BMI), which offers smart water meters to local governments and has raised its dividend every year for decades.
Kirwan also likes Broadcom Inc. $(AVGO)$, the chip supplier that's become a popular AI play. Broadcom's double-digit revenue growth over the past five years has supported 21% annualized five-year dividend growth, and it pays a 1.37% yield.
Hare at Huntington Private Bank favors several tech companies for yield, including Microsoft, Broadcom, software giant IBM Corp. $(IBM)$ and Qualcomm Inc. $(QCOM)$, whose communication chips are increasingly used in devices beyond smartphones.
Muggia at Westfield Capital Management likes Meta because it's using AI to improve product and boost revenue; Microsoft for its pricing power, big presence in cloud computing and use of AI to accelerate growth; and SAP $(SAP)$, which is boosting revenue growth by migrating its business to the cloud.
Buckingham at the Prudent Speculator chooses Qualcomm, Corning Inc. $(GLW)$ in optical communications equipment, Hewlett Packard Enterprise Co. $(HPE)$ in enterprise storage and networking, and Seagate Technology Holdings $(STX)$ in storage drives.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned META, GOOGL, NVDA, MSFT, APPL, AVGO, and QCOM. Brush has suggested META, GOOGL, CRM, NVDA, MSFT, APPL, AVGO, IBM and QCOM in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.
More: This approach to dividend stocks can diversify your S&P 500 index-fund exposure
Plus: Nvidia bleeds $279 billion of market cap, but its stock has plenty of defenders
-Michael Brush
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September 07, 2024 11:22 ET (15:22 GMT)
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