This is a guest contribution by Pierre Raymond
The technology industry is synonymous with innovation and development. It’s for good reason that tech stocks have become a lucrative investment opportunity for many private investors.
But while modernization is at the heart of the industry, many leading tech giants have yet to offer dividends to shareholders. In 2011, only one in four tech stocks managed to pay dividends; today, half of all tech stocks offer dividends.
It’s taken the tech industry a decade to offer dividend-paying stocks. While these companies may generate steady cash flow and show positive annual growth, it’s the underlying layers that reveal a much more complex scenario.
In the last few months, tech stocks have grown by 47.5%, a steady return in the wake of the global pandemic. While the healthy industry growth has continued, digital leaders like Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), and Netflix (NFLX) have seen more than 50% growth in recent months.
Which begs the question: will they ever start paying a dividend one day?
It’s an intricate road to follow, but we need to understand tech stocks better before a solid resolution is brought to the table.
Tech Shares: An Overview
We need to find ourselves around the labyrinth of complexities encompassing tech stocks.
Tech shares represent 26% of the S&P 500. According to the official S&P Dow Jones Indices, these tech giants are subdivided into various sectors.
For information technology, you can find companies such as Apple, Cisco, Microsoft, and Intel. While communication services include Alphabet and Facebook, among others. Amazon is categorized under the consumer discretionary sector.
While some of these companies offer a dividend, the S&P 500 has previously reported that the amount of dividend-paying companies has been decreasing in recent months.
In the first quarter of 2020, 413 companies were issuing dividends. For the same time in 2021, that number has gone down to 385, making up around 76% of the S&P 500 index.
As the S&P closely monitors the rate at which these companies increase, or decrease their dividends. In 2021, the 12-month dividend decreases came up to $66 billion, more than the $24 billion reported for the same time in 2020.
These companies are outperforming the market in different spheres, and at a different pace. There is no single space in the market for new technological innovations, which has added to the difficulty of offering to issue dividends.
The Effort Continues
Already we’ve seen how the market and the industry aren’t necessarily met in one singular bubble. Yet, these may overlap to some extent, non-dividend-paying tech giants are remaining closed over whether they will offer dividends in the coming years.
Yet, the S&P average dividend yield of 1.3% is still a challenge for even the largest companies to beat. Apple (0.6%) and Microsoft (0.8%) have yet to beat this average.
Consider the following scenario of Meta Platforms (FB), a non-dividend paying company.
Facebook (or Meta) might’ve become a global leader in communication services, but the company has for years declined to offer dividends.
The communications giants managed to increase its free cash flow by 108% in 2021, bringing the total up to $16 billion. If Facebook shareholders would receive around $4 – $5 per share annually, the company would need to pay out more than $12.9 billion to its 2.8 billion outstanding shares.
While Facebook’s cash flow has seen significant increases, dividends would claim more than 40% thereof. This is to say the company meets the S&P average of 1.3%. While it might seem plausible, to some extent, Facebook, like many others, are looking to reinvest their free cash flow into various other securities.
Facebook is looking to develop advanced Metaverse Platforms, with an estimated capital expenditure of $29 billion, a hefty price tag to create a next-generation experience.
While various factors already influence the chances of tech giants looking to offer dividends, we should also consider tax and regulatory issues.
The marginal tax rate for ordinary investors who received non-qualified dividends stands at 37%, while qualified dividends are taxed between 0% to 20%. The higher an investor’s dividend income becomes, the quicker they’ll move up the tax bracket ranking. This move will increase the annual amount of tax investors would need to pay.
To curb the increased cost of issuing new stock and dividends, companies are declining dividend shares. Companies are using free-flowing cash as a way to innovate and develop the company further. Rather than offering a cash payment to its investors, it’s offering potential and consistent growth in a competitive market.
The rate at which these tech giants are expanding, and growing, market capacity will increase in the coming years. Investors looking to diversify their portfolios with tech stock should consider various factors, but overall the market has yet experienced some sense of saturation.
Tech stocks remain an attractive investment opportunity regardless of whether the company issues dividends or not. And for these companies to allow the issuing of dividends would mean increased capitalization of the market and its services.
Will we see tech giants paying a dividend one day? The question is mainly answered by the ambitions and innovations the company is looking to pursue in the coming years.
The capacity of these companies to issue dividends has seen them expand, regardless of global financial issues. Yet, it’s those who’ve managed to garner a longstanding relationship with the public, aiming to become a leader of cutting-edge technology. The investor is merely a shareholder in the prospects of the company.
About the Author
Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.
See the articles below for analysis on whether other stocks that currently don’t pay dividends, will one day pay a dividend: