Sure Dividend

Updated on March 19th, 2023 by Nathan Parsh

Income investors can find quality dividend stocks from various market sectors, such as health care, utilities, and consumer staples. However, the technology sector still includes many large-cap stocks that do not pay dividends to shareholders.

Alphabet (GOOG) (GOOGL) is one of the ~90 stocks in the S&P 500 Index that remains a dividend holdout. While Alphabet has never paid a dividend, many other stocks, such as the Dividend Aristocrats, have long histories of dividend growth.

The Dividend Aristocrats are a group of 68 stocks in the S&P 500 Index with 25+ consecutive years of dividend growth. You can see all 68 Dividend Aristocrats here.

Additionally, you can download a full list of all 68 Dividend Aristocrats, along with important metrics that matter (such as dividend yields and price-to-earnings ratios) by clicking on the link below:

But just because a company does not currently pay a dividend, does not necessarily mean it never will. Alphabet certainly generates enough free cash flow to support a dividend payout, meaning it theoretically could choose to start paying a dividend at any time.

While it is not a sure bet in the near term, investors should not completely ignore the possibility of Alphabet joining the long list of dividend stocks at some point in the future.

Business Overview

Investors most likely know Alphabet by its former name, Google. It changed its name to more accurately reflect the fact that it has expanded well beyond its origins in search. It now exists as a conglomerate known as Alphabet. The stock trades under two share classes, an ‘A’ class, and a ‘C’ class. The ‘A’ class, GOOGL, has voting rights, while the ‘C’ class, GOOG, does not.

Alphabet is a massive technology giant. It is a mega-cap stock with a market capitalization of $1.3 trillion.

Alphabet operates several businesses: Google search, Android, Chrome, YouTube, Nest, Gmail, Maps, and more. These businesses lead their respective categories and continue to drive growth for the company.

In February 2022, Alphabet announced a 20-for-1 stock split.

In early February (2/2/2023) Alphabet released fourth-quarter and full year financial results.

Source: Q4 Press Release

The company reported $76 billion in revenue for the quarter, up 1% compared to the same quarter last year. For 2022, revenue grew 10% to $282.8 billion. On a constant currency basis, fourth-quarter revenue was up 7% and full year revenues increased 14%, both solid growth rates.

Advertising revenue, which remains Alphabet’s largest source of revenue, fell 3.6% to $59 billion for the quarter. Partially offsetting these results was 32% growth in Google Cloud.

For the quarter, net income totaled $13.6 billion, and earnings-per-share came in at $1.05, compared with net income of $20.6 billion, and earnings-per-share of $1.53, in the same period the previous year, as rising expenses weighed on the bottom line. For the year, net income of just under $60 billion, and $4.56 of earnings-per-share, compared unfavorably to $76 billion, or $5.61 of earnings-per-share.

Growth Prospects

There is little doubt that Alphabet was one of the best high-growth stocks of the past decade. Despite last year’s results, Alphabet grew earnings-per-share by an average compound rate of 10.9% annually from 2012 through 2022. This is impressive growth, as even as more than a decade ago, Alphabet was a very large company.

Its growth was largely fueled by its core search business, while newer platforms like YouTube have added to its growth. Going forward, although we do not expect Alphabet to maintain its huge growth rates of the past, we do believe the company can continue to grow at a satisfactory rate.

We continue to expect double-digit EPS growth, but at a more conservative estimate of 12% annually over the next five years, focused on two specific growth drivers. First, Google remains the world’s dominant search engine, which generates a remarkable amount of cash. It is true that growth in search may slow at some point, but we see plenty of opportunities as the network effect continues to take hold worldwide (making Google more and more valuable to advertisers with each additional user).

Second, the company makes significant investments in new technologies through its operating segment, Other Bets. This segment is where Alphabet makes high-risk, high-reward investments. Alphabet’s Other Bets include life sciences brand Verily and Google Fiber, which provides broadband internet services in the United States.

The Other Bets segment still represents a very small part of the company but is growing rapidly. And while many ventures inside the Other Bets segment will not pan out, others could propel Alphabet to its next major growth product or service.

In the meantime, Google’s core search business remains a cash cow with plenty of future growth potential. Additional growth is likely from Google’s other major businesses, such as YouTube and Android. Google is still very much a growth company. And thanks to its huge size, it now has the financial strength to possibly pay a dividend to shareholders at some point in the future.

Why Alphabet Could Pay A Dividend

The main reason why companies do not pay a dividend is rather simple. Some companies simply cannot afford to distribute cash to shareholders. This is fairly common in technology, a rapidly changing and highly competitive industry that requires significant investment in growth. Many technology companies need to plow all cash flow back into the business to continue innovating to stay ahead of the competition.

However, Alphabet is far removed from its days as a startup. It is now a diversified tech conglomerate with annual revenue of approximately $283 billion. The company is also highly profitable. We expect Alphabet to generate earnings-per-share of $5.19 in 2023, which aligns with analyst estimates. Plus, Alphabet generates plenty of cash flow. Last year, the company generated free cash flow of almost $60 billion.

This would, in theory, allow Alphabet to pay a dividend if it chose to. For example, Alphabet could choose to distribute 25% to 30% of its annual EPS, which would still represent a fairly low payout ratio. In this case, the company would pay a dividend of $1.30 to $1.56 per share. The recent Class A stock price of $102 per share would equal a dividend yield of 1.3% to 1.5%.

Alphabet would not be considered a high-yield stock by any means, but dividend-paying technology stocks rarely provide above-average yields. Fellow tech giants Apple (AAPL) and Microsoft (MSFT) have dividend yields of 0.6% and 1.0%, respectively. Alphabet’s projected dividend payout would be roughly aligned with its closest peers. And its future EPS growth would likely allow for the company to raise its dividend at a high rate.

Finally, Alphabet’s fortress balance sheet provides another reason for the company to return cash to shareholders through a dividend. Alphabet ended the most recent quarter with $114 billion in cash, cash equivalents, and marketable securities, with another $30.5 billion in non-marketable investments on its balance sheet.

Alphabet has a mountain of cash piled up, and debt is not much of a concern. It ended 2022 with just $14.0 billion of long-term debt, giving the company ample liquidity to further support a dividend.

Final Thoughts

Like many technology stocks, Alphabet has never paid a dividend to shareholders. But as companies mature and grow their profits and cash flow, their ability to pay dividends also rises. It appears Alphabet is easily able to pay a dividend; it simply has not made the decision to initiate a dividend yet. But this could change, which is why investors should not be surprised to see Alphabet start paying dividends at some point in the next several years.

See the articles below for an analysis of whether other stocks that currently don’t pay dividends will one day pay a dividend:

1. Will Amazon Ever Pay A Dividend?
2. Will Shopify Ever Pay A Dividend?
3. Will PayPal Ever Pay A Dividend?
4. Will Advanced Micro Devices Ever Pay A Dividend?
5. Will Chipotle Ever Pay A Dividend?

For investors looking for more high-quality dividend stocks, the following lists may be useful:

• The Dividend Aristocrats: S&P 500 stocks with 25+ years of consecutive dividend increases.
• The High Yield Dividend Aristocrats List is comprised of the Dividend Aristocrats with the highest current yields.
• The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 45 stocks with 50+ years of consecutive dividend increases.
• The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
• The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
• The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
• The 20 Highest Yielding Monthly Dividend Stocks: Monthly dividend stocks with the highest current yields.
• The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
  Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
• The Dividend Contenders List: 10-24 consecutive years of dividend increases.
• The Dividend Challengers List: 5-9 consecutive years of dividend increases.
• The Complete List of Russell 2000 Stocks: arguably the world’s best-known benchmark for small-cap U.S. stocks.
• The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
• The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
• The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
• The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.