It’s a Good Time to Look at Apple and Other Growth Stocks That Pay DividendsLast Updated: May 6, 2024 at 5:22 p.m. ETFirst Published: May 6, 2024 at 12:09 p.m. ET
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Paul R. La Monica
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MICHAEL M. SANTIAGO/GETTY IMAGES
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Apple announced it was boosting its dividend in its earnings report last week. Tech titans Meta Platforms, Alphabet, and Booking Holdings all initiated dividends this year. Paying a dividend is all the rage for cash-rich companies. And Wall Street is starting to notice.
Wolfe Research said in a report Friday that a combination of growing dividends and healthy free cash flow is a recipe for success.
“While many investment strategies have lagged the tech-heavy S&P 500 and ‘Mag 7’ stocks over the past year, high dividend growth and high free cash flow has kept up,” Chris Senyek, chief investment strategist with Wolfe Research, wrote in the report.
It’s worth noting that the Magnificent Seven is also a dividend-friendly group. Now that Facebook’s owner and Google’s parent are paying dividends, that leaves only Tesla and Amazon.com as the non-dividend payers in this septet. Microsoft and Nvidia pay dividends in addition to Apple.
But none of these techs were on Wolfe’s list of top dividend and free-cash-flow companies. Several other prominent tech companies made the cut, though, including eBay, Qualcomm, Skyworks Solutions, Dell Technologies, and HP.
The rest of the list had a mix of industrials, consumer, health care, materials and utilities, names you’d expect to see in a group of dividend-growers. Home builder Pulte, retailer Tapestry, Dow components Amgen, Johnson & Johnson, and UnitedHealth Group, Boise Cascade, Owens Corning, steel and aluminum company Reliance, and electricity provider Vistra, which is about to join the S&P 500, all made the cut.
Others note that the recent stock-market choppiness also could give dividend-payers a lift.
“Dividend investing is an attractive long-term structural investment strategy, it’s tried and true,” Ben Kirby, co-head of investments of Thornburg, wrote in an email to Barron’s. “It tends to generate attractive returns and, in many cases, better returns to the overall market, usually with less volatility.”
Kirby mentioned telecoms such as Vodafone Group and France’s Orange as well as big banks Citigroup, JPMorgan Chase, and BNP Paribas as top dividend growth stocks.
Kirby said that dividend stocks also tend to be cheaper than the broader market, noting that many dividend stocks around the globe trade around12 times earnings estimates, and pay yields at about 4%. He added that “if you try a little bit harder, you can build an active portfolio that has a 5% yield, is trading at 10 times earnings and has the potential for that dividend stream to grow over time.”
Along those lines, none of the stocks on Wolfe’s list are particularly expensive, with price/earnings multiples based on 2024 earnings estimates ranging from a low of 6.5 for Nexstar Media Group to a high of 23 for Constellation Energy, a nuclear power leader that has gotten a big boost as a backdoor artificial-intelligence power play.
None of the stocks on the Wolfe list are paying exorbitant dividends, either, with most yields ranging from 1% to 4%. So they aren’t “value traps” that only have high yields because of a plunging stock price. What’s more, the dividends have grown dramatically for these stocks and the companies also have free-cash-flow yields in the mid- to high-single-digit percentages: another sign of financial strength.
Dividend stocks may also continue to gain favor if bond investors start flocking to them for income now that long-term Treasury yields have pulled back a bit.
“Dividend stocks could make sense. Bonds generally speaking are quite richly priced,” Atul Bhatia, fixed-income portfolio strategist at RBC Wealth Management, said in an interview with Barron’s. Bhatia added that it’s an “open question as to whether investors will be willing to stay in bonds” if yields continue to fall, and that if you are still looking for income, “why not put more money into equities?”
And as long as corporate balance sheets remain healthy, companies with a ton of cash will probably continue to boost their dividends. Apple didn’t make the Wolfe Research dividend/free cash flow list, but the company did just boost its dividend by 4% (in addition to announcing a large stock buyback), and is likely to keep raising it for the foreseeable future.
“The dividend increase signals to investors that they’re serious about profitable growth and returning value to shareholders,” Global X research analyst Ido Caspi wrote in a report after Apple earnings.
Write to Paul R. La Monica at paul.lamonica@barrons.com |
