Does Initiating Dividends Spell the End of Growth for Tech Companies?

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When major technology companies decide to begin paying quarterly dividends, some market observers treat the news as a rite of passage akin to getting one’s first pair of “Dad jeans,” a sign that a dynamic and rapidly growing upstart has morphed into a (gasp) mature business.

Of course, most companies would be happy to reach a stage where they are entrenched players in their chosen industry, with established products and experienced managers in place. But maturity can carry a different connotation in the tech industry. For technology firms, it is often equated with a company reliant on legacy products and/or under threat from disruption, as well as a business lacking better places to reinvest its cash flow.

This year, some big technology names—among them, Alphabet (parent of Google), Meta (parent of Facebook), Salesforce, and Booking Holdings—have initiated dividends. Should these firms now be perceived as slowing just because their shareholders will be receiving dividend checks?

We think worries about whether a company is mature or not are beside the point. The real issue is whether large, established technology firms can still generate new, leading-edge products and services—and achieve strong growth while doing so. We believe they can, while still being able to pay cash to shareholders on a regular basis. One key signal may be in their ability not to only pay a dividend but to increase it consistently each year.

What does a dividend mean?

First, a brief refresher. A dividend is a cash distribution to shareholders that a company typically declares each quarter unless specifically indicated as a one-time “special” dividend. It indicates a degree of confidence from a company regarding the durability of its business and the ability to pay this distribution consistently; history has shown that companies that cut or eliminate the dividend often see a negative impact on their share prices.

In addition, a dividend signals capital discipline, as company management needs to generate sufficient cash flow to support this dividend payment on an ongoing basis. Is it such a bad sign that these big technology companies see their businesses as durable and are exercising prudent capital discipline?

Why are dividends perceived as a sign of a slowdown?

Earlier-stage businesses often need capital to invest and innovate. Distributing cash to shareholders at an early stage would suggest that management sees a lack of high-return opportunities in which to reinvest its capital. But there does come a time when free cash flow reaches a level above even those reinvestment needs. Many technology companies have used this cash flow above reinvestment needs for share buybacks. And while buybacks can remain a prudent and opportunistic method to return excess cash to shareholders, consistent (and growing) dividends are another efficient method that indicates durability, capital discipline, and growth.

Do technology dividend initiations signal the end of innovation and growth?

Not necessarily. Google is one of the leading innovators in Generative AI and is applying this technology across its key businesses including Search, YouTube, Google Cloud Platform, and mobile devices. Growth is expected to continue at an attractive pace for Google. Meta is leveraging AI for its recommendation engines that are driving accelerated time spent in its family of apps (i.e., Facebook, Instagram, and WhatsApp) and better targeted advertising. Meta’s investments in large language models are another potential incremental driver of market expansion.

NVIDIA initiated its dividend in November 2012. From fiscal 2013 through fiscal 2024, NVIDIA compounded revenues at 27% versus 12.8% in the year of its dividend initiation and has seen its shares rise over 27,000% since its first dividend declaration. While it is unlikely this feat will be replicated by the recent crop of technology dividend initiators, the revenue growth rates of Google, Meta, Salesforce, and Booking Holdings are within the range of NVIDIA’s revenue growth when it initiated its dividend over 11 years ago.

What role can dividends play in investment returns?

Dividends have driven over 40% of total return for the S&P 500^® Index since 1929, according to Ned Davis Research (see Figure 1). Given the growth outlooks for many of these recent technology dividend initiators and the initial modest payout ratios, it is likely the annual dividend distributions will grow for many years to come for these firms.

Figure 1. How Dividends Have Contributed to Total Return Through the Decades

Contributions to total return of S&P 500® Index by decade for capital appreciation and dividend income

Source: Ned Davis Research. Historical data for each indicated decade. A company's dividend payments may vary over time, and there is no guarantee that a company will pay a dividend at all. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.

Why is the potential for dividend growth so important?

Warren Buffett wrote in his 2022 letter to Berkshire Hathaway shareholders about the company’s initial investment in Coca-Cola. Berkshire invested $1.3 billion in shares of the soft-drink giant between 1987–1994, and by 1994, was collecting $75 million in annual dividends. By 2022, after consistent annual growth of Coke’s payout, Berkshire received over $700 million in dividends that year alone from its initial investment. Put another way, Berkshire is now receiving over a 50% dividend yield on its initial cost. (Yield-on-cost is a measure of dividend yield calculated by dividing a stock's current dividend by the price initially paid for that stock.)

Apply Berkshire’s experience to the broader market and you get a sense of the power of rising dividends. In the years 1973–2022, stocks of companies that consistently grew their dividends over time achieved higher returns than the equal-weighted S&P 500, with lower volatility, as shown in Figure 2.

Figure 2. Dividend Growers Have Historically Outperformed, with Lower Volatility

Average annual returns and volatility (as measured by standard deviation) by dividend policy within the S&P 500® Index, January 31, 1973–December 31, 2022

Source: Ned Davis Research. Data as of December 31, 2022 (most recent data available). Dividend Cutters, Payers, and Non-Payers are subcomponents of the S&P 500 Index. Dividend Growers are subcomponents of the S&P 500 or S&P 400 Index. The categories are created using actual annual dividends to identify dividend-paying stocks and are rebalanced annually. The dividend policy for each stock is determined on a rolling 12-month basis. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

The S&P 500^® Equal Weight Index (EWI) is the equal-weight version of the S&P 500^® Index. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

Standard deviation is a statistic that measures the dispersion of a data set relative to its mean. The higher the standard deviation, the further the observed data are from the mean.

Past performance is not a reliable indicator or guarantee of future results. The historical data shown are for illustrative purposes only and do not represent any specific portfolio managed by Lord Abbett. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

Welcome to the Dividend Universe

With their dividend announcements, the four tech luminaries mentioned above have joined a long list of companies across every industry. The attractiveness of Equity Income (dividend-paying stocks) to provide both current income and capital appreciation has driven a large asset class for investors in these businesses. So welcome, Google, Meta, and the rest. You’re joining a collection of high-quality companies that has long offered attractive returns and lower volatility to investors. And as for the naysayers who claim that “dividend payers are too mature to innovate and grow,” NVIDIA shareholders would like to have a word with you.

LAMAX

Class A

Dividend Growth Fund

The Dividend Growth Fund invests primarily in stocks of large U.S. companies that have a history of increasing their dividends. Learn more.

Learn More

About the Contributors

Darnell Azeez, CFA

Partner, Portfolio Manager

Subrata Ghose, CFA

Portfolio Manager

Jeffrey Rabinowitz, CFA

Portfolio Manager

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Standard deviation is a statistic that measures the dispersion of a data set relative to its mean. The higher the standard deviation, the further the observed data are from the mean.

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