Can Big Tech Stocks Become Income Stocks?

Tech stocks are traditionally considered as growth stocks. They are great for growth but not dividends. In fact, most tech stocks do not pay any dividend at all and this has been the case for years. Investors buy these stocks with the hope of rising share prices and not earn a steady income in the form of dividends as with utility or consumer staple stocks for example. However that perception seems to be changing at least with some of the tech stocks especially with respect to the magnificent seven.

The current dividend yield on the S&P 500 is a measly 1.37%. Dividend yields on the index has been on the decline since the 1980s and have stayed at or below 2% for many years now.

Last month Facebook owner Meta Platforms(META) announced the first dividend ever in its history of 50 cents per share for a quarter. It also announced share buyback of an additional $50 billion. Shares of the social media network company shot up by more than 14% after-hours when the news was announced.

The bigger question on some investors’ mind is this: Are tech stocks starts are turn into dividend or income stocks? Meta is not the only big tech stock that pays dividends. Among the magnificent seven, Apple(AAPL), Microsoft(MSFT) and Nvidia (NVDA) also pay a dividend other than Meta. Alphabet(GOOGL), Tesla(TSLA) and Amazon do not pay a dividend. It is not clear if they will follow the others in the group and pay at least a nominal dividend.

Though four of the big techs pay a dividend, the amount of the dividend is tiny compared to their share prices. The dividend yield is so low for income investors to get excited about. Moreover these firms spend few more of their earnings on buybacks than dividend payouts.

With that said, I had bookmarked an article that discussed the topic of tech stocks for income. From that article:

The income you might receive from the Magnificent 7

If you take the four Mag7 companies that now pay dividends, you get a simple average yield of 0.43%. That’s not much, even compared to the low yield currently available from US shares overall. While these dividends should grow over time, they’re unlikely to make up a significant proportion of investors’ overall returns in the near term.

While the remaining Mag7 companies could easily pay dividends, Amazon and Tesla have both ruled it out for the foreseeable future. They intend to retain all earnings to finance future growth. Alphabet has been far less categorical on the matter. 

The value conundrum

Investors have always had trouble placing a fair value on tech stocks. Valuations fluctuate and when they get out of line the goalposts tend to get changed. High valuations beget more talk of the rationalities of paying up for innovation and repeatable growth way out into the future.    

The trouble today is that momentum is the only game in town. America’s mega-cap tech stocks sped higher in 2023, while the rest of the US stock market bumped along the bottom. India’s stock market went up (almost) in a straight line, while most other emerging markets didn’t even make it onto investors’ radars. While that’s happening, value indicators have less merit. Until, of course, something upsets the party and then they’re tremendously important once again. 

So are dividends good or bad?

Traditionally, ex-growth companies paid dividends. Sustained high dividends generally meant that a company had reached the stage where shareholder loyalty was considered more important than reinvesting all profits back into a business.  

There’s still a sense of that these days, which is why Meta’s inaugural dividend may have raised a few eyebrows. On the basis of the company’s own growth outlook, the mature business argument doesn’t apply. But it might in the future. 

Apple’s growing dividends have confused some investors, certainly. In the past there has been talk of Apple turning into an income-growth stock as it matures. That’s overdone for sure, bearing in mind its 0.5% yield. In any case, a good total return is what counts, and if that can be achieved with a bit less risk than before, that’s all to the good.  

However, dividend payments can still sit uneasily with investors seeking the strongest possible capital returns. If a business is expected to grow quickly, why not put as much as you can back into it?  

The answer is these companies are throwing off so much cash, it’s become hard to reinvest it all to produce more growth. Paying a dividend puts some of that cash to work by reinforcing shareholder loyalty. 

Source: Can big tech become a new source of income? by Graham Smith, Fidelity UK

I agree with the author’s views. The big tech companies are making too much money and they do not find enough opportunities to invest the cash. Very few of investors in these stocks expect a dividend. Due to the preferential tax treatment of capital gains over dividends investors would rather love share price growth than any amount of dividends from these companies.

If these companies are implying they are reaching the maturity by paying a dividend its not to going to be too long before other firms rise up to the competition and dislodge these companies from the top spots.

Based on the last closing of $502.30, Meta’s dividend yield is 0.40%. This rate is hardly going to make a difference in the total returns an investor may earn buying at this price. Should the share price go up even more the 50 cent quarterly dividend would look even more meaningless.

So in summary, tech stocks are still growth stocks. Investors should not consider them as dividend stocks by any means. Investors looking for income are better off buying stocks from other income-oriented sectors than tech stocks.

Disclosure: No positions

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