The dividends paid by U.S. companies in the second quarter were four times that of the same period last year. Will there be investment opportunities in high-dividend stocks in the future?
Analysts believe that high-quality, high-dividend stocks are worth investing in in the future.
Since the beginning of this year, dividends from U.S.-listed companies have become increasingly generous.
In the second quarter just passed, data showed that US listed companies paid a total of $16 billion more in dividends than in the first quarter, about four times the size of the same period last year. Parent company Alphabet and Meta Platforms led the dividend payments in the second quarter. Some analysts believe that high-quality, high-dividend stocks are worth investing in in the future.
US companies' second-quarter dividends are four times higher than last year
According to S&P Dow Jones According to the index, US listed companies paid a net additional dividend of $16 billion in the second quarter, higher than the net increase in the first quarter and about four times the same period last year. At this rate, it is estimated that US listed companies will pay 6% more dividends this year, higher than last year's 5.2% increase.
The "Magnificent Seven" that led the US stock market's rally were also important contributors to dividend payments. Among them, two giants, Alphabet (GOOGL) and Meta Platforms (Meta), were the biggest drivers of dividend payment growth in the second quarter.
Alphabet paid its first dividend of $0.20 per share in mid-June. This initial dividend yield is 0.4%, which is far lower than the 1.3% average yield of the S&P 500, but due to the high share price, the dividend is still huge, equivalent to paying about $10 billion to shareholders each year. This also makes Alphabet the largest contributor to the net increase in total dividend payments in the second quarter of the US stock market.
For a technology giant like Alphabet, it is not difficult to pay such a huge dividend. In the first quarter of this year alone, the company earned $16.8 billion in free cash. It also has $108 billion in cash and marketable securities on its balance sheet, and long-term debt is only $13.2 billion. In addition to high dividends, this strong financial condition also enables the company to increase $70 billion for its stock repurchase program. Market participants believe that the initial dividend rate of 0.4% is just the starting point. Given the company's first-quarter earnings growth of more than 50%, dividend payments will continue to increase steadily in the future.
Following Alphabet is another "Big Seven" Meta Platforms, which started dividend payments in the first quarter and has paid $0.50 per share quarterly since then. Like Alphabet, although the company's dividend yield is only 0.4%, its total annual dividend payments still reach $4.4 billion, and $1.3 billion in dividends were paid in the second quarter. This makes Meta's absolute dividend increase the second highest this year, surpassing Salesforce, which ranks third and fourth. These three stocks, along with Alphabet, account for 53% of the net dividend growth for U.S. companies this year.
Like Alphabet, Meta's financial profile supports the company's ability to pay such a large dividend. The company generated $12.5 billion in free cash flow in the first quarter and had $58.1 billion in cash, equivalents, and marketable securities on its balance sheet. This solid financial profile also gives Meta the flexibility to invest heavily in artificial intelligence (AI) and repurchase $14.6 billion of its own stock in the first quarter. In addition to its strong financial profile, Meta's earnings are also growing rapidly, with earnings increasing by more than 110% in the first quarter. The company's heavy investments in AI are also likely to drive strong growth in the future.
High dividend stocks will create investment opportunities
Although dividend payments in the second quarter were led by two major technology stocks, most stocks that traditionally offer high dividends still belong to other industries. Many analysts believe that high-quality, high-dividend stocks in many "lagging" industries will show investment value next.
John Baldi, portfolio manager of ClearBridge Investments, an investment institution under Franklin Templeton, told the First Financial reporter that since last year, the concentration of the U.S. stock market has become a situation that investors cannot ignore. The recent market share of the "Big Seven" has reached about one-third of the weight of the S&P 500 index. Although there are excellent companies in this group, this extreme market concentration highlights the need for diversified risk management. In addition, as these stocks continue to soar, their valuations are becoming increasingly "stretched", increasing investment risks. This situation has created corresponding opportunities for companies that have not participated in this artificial intelligence (AI)-driven U.S. stock rally. In particular, high-quality, high-dividend stocks have lagged for some time, providing investors with an attractive opportunity.
"Although not as dazzling as the AI industry, industries such as utilities, real estate, and consumer staples have relatively attractive potential total investment returns in the future. These industries have lagged behind the market in 2023 due to the Fed's interest rate hikes. In the past year, the stocks that provide high dividends in these industries have lagged behind the broader market to a degree rarely seen in the past three decades. After similar levels of lag in history, these stocks have subsequently rebounded strongly." He said, "If history is a guide, high-dividend stocks in these industries will also rebound next, especially those with reasonable valuations and good corporate quality."
Nanette Abuhoff Jacobson, global investment and multi-asset strategist at Wellington Management, is also bullish on value stocks that offer high dividends.
Value stocks are usually concentrated in mature cyclical industries, which are often characterized by low price-to-earnings ratios, stable cash flows, low growth rates, and high dividend yields. However, he told the reporter from China Business News that their research shows that, slightly different from past common sense, the performance of value stocks in the U.S. stock market is not necessarily completely synchronized with the economic cycle.
"Investors often assume that value stocks outperform during the recovery and expansion phases of the economic cycle after a recession. But we studied the performance of value and growth stocks in the six and 12 months after the nine recessions since 1960. In the six months after a recession, value stocks outperformed growth stocks five out of nine times. In the 12 months after a recession, value stocks outperformed growth stocks six out of nine times. It can be seen that there is no obvious relationship between the performance of value stocks and the economic cycle." However, he said, "Our research found that at different stages of the economic cycle, inflation levels, real interest rates and US gross domestic product (GDP) will have an impact on the US value or growth stock cycle. Based on our outlook for these drivers, we believe that value stocks will perform well in the next three to five years, and both structural inflation and rising real interest rates will help the performance of US value stocks. Therefore, after the growth stocks have led the market in the past period of time, it is best to seek a more balanced allocation between growth stocks and value stocks in the future."