Dividend-loving investors around the globe probably woke up on Friday with a little extra spring in their step.
Meta Platforms did it. The company announced, on Thursday, its first-ever quarterly dividend. The company will pay a 50-cent dividend, on Mar. 26 to shareholders of record on Feb. 22.
Big tech investors might be confused though. They aren’t used to getting quarterly payouts from the likes of Meta. They shouldn’t worry though and should like what payments mean for Meta stock down the road.
Meta’s annualized $2 payout gives its stock a dividend yield of 0.4% based on an early Friday price of some $472 a share. Meta stock was up almost 20% in early trading following better-than-expected fourth-quarter earnings. The S&P 500 and Nasdaq Composite were up 0.2% and 0.7%, respectively.
The average yield for a dividend-paying stock in the S&P 500 is about 2%. Meta’s payout is lower than that rate, but companies typically start small. Investors can now look forward to dividend growth — and stock gains.
Microsoft declared its first dividend on Jan. 16, 2003. It was an annual dividend of 8 cents a share, giving shares a yield of about 0.3%. A year after the declaration, Microsoft stock was 10% higher and the 2024 annual dividend was hiked to 16 cents. Today, Microsoft pays a 75-cent quarterly dividend and has paid shareholders some $28 since 2003. That’s more than the stock price was when the first dividend was declared.
Apple stopped paying dividends in 1995 and restarted in 2013 with a $2.65 declared on Jan. 23. Adjusting for all the splits, the 2013 dividend resulted in an annualized yield of about 1.4%. Apple shares were up about 24% over the next year following the announcement. Apple has paid a total of about $34 a share since the restart.
It’s only a small sample size of two, but both results are encouraging. Now three of the seven Magnificent 7 stocks pay dividends. Tesla, Alphabet, Nvidia, and Amazon.com do not.
Two of those four could — and probably should. Alphabet could achieve a 1% dividend yield by paying out about 25% of its free cash flow, which analysts project to be about $77 billion in 2024, according to FactSet. That isn’t a burdensome amount. S&P 500 dividend payers typically pay out about 50% to 60% of free cash flow. Starting at 1% or lower for Alphabet leaves cash to invest for growth.
A 1% yield is a slightly bigger ask for Amazon. That yield requires $18 billion in annual dividend payments. Amazon has the cash flow, but it also fluctuates wildly. The company generated about $37 billion in free cash flow in 2023 but used about $12 billion in 2022. Amazon, however, is projected to generate $66 billion in 2024, which could easily support a dividend. Paying out 20% of that would result in a yield of about 0.8%.
Why stocks rise after dividends are announced is a function of many things, including the overall economy. Dividends, however, do signal management’s confidence about the future. What’s more, initial dividend payments also open up shares to investors who will only hold stock in dividend payers.
Whatever the reason, dividends are typically welcomed by shareholders.
Write to Al Root at allen.root@dowjones.com