Google parent company Alphabet said Thursday that it would issue its first-ever dividend to shareholders. The dividend is just 20 cents a share, but it was notable as a first-time event. In addition to investors receiving a dividend, Google's co-founders, Sergey Brin and Larry Page, will receive a dividend of $146 million and $78 million, respectively.
Since its founding in 1998, Google has returned money to its investors through outsized performance and growth in its stock price. But now it's changing things up. And in doing so, it's looking like more mature companies in other industries.
Perhaps most importantly to investors, Alphabet said it will continue to pay quarterly dividends going forward, as long as market conditions and the company's performance during those periods allow for it.
Why dividends matter
Dividends act as an important tool in the corporate world, allowing investors in a company to generate cash from their investments without needing to sell shares. Dividends are often used as a signal to Wall Street that a company is performing well, has cash to burn and wants to share that value with investors. They're also used by companies to boost a stock price when investors are concerned about its long-term prospects.
Dividends are used differently by various industries. In the real estate industry, dividends are commonplace and used liberally by companies to entice shareholders.
In the tech industry, however, some of the biggest companies, including Amazon, Alphabet and Meta, have rejected dividends in favor of reinvesting cash back into their businesses to generate more profits, grow their services and ultimately increase shareholder value by boosting stock prices. The moves have worked: In just the past five years, Meta's stock price has more than doubled, to $441, Alphabet's shares have nearly tripled, to $158, and Amazon's shares have jumped from $97 five years ago to $173 today.
A new trend for the tech industry?
So, why is Google suddenly having a change of heart? The company didn't say. But it may be following the crowd.
In February, Meta announced its fourth quarter and full year earnings for 2023, and said it would offer its first-ever dividend to investors. That dividend, 50 cents a share, will help Facebook co-founder and Meta CEO Mark Zuckerberg net $700 million this year alone if Meta follows through with its plan to pay four quarterly dividends.
To be sure, dividends haven't been universally avoided by tech companies. Microsoft issued its first dividend in 2003, nearly 30 years after its founding, and has consistently issued quarterly dividends to shareholders since 2013. Apple issued its first quarterly dividend in 1987, and has spent the last decade using quarterly dividends to return cash to its investors.
But to say that technology companies prefer dividends would be a gross overstatement. Even when tech companies issue dividends, they typically deliver less cash back to investors than other sectors.
Current technology-company dividend yields, a measure of how much return investors can earn back in dividends as a percentage of the company's current stock price, hovers at 1.2 percent, according tomarket tracker MacroMicro. Energy companies lead the market, with dividend yields of 4.1 percent, followed by 3.7 percent for real estate companies. Only consumer discretionary stocks, which include fast-food restaurants, apparel companies and other businesses affected by consumer discretionary spending, offer a lower dividend yield, of 1.1 percent.
Part of the technology industry's resistance to issuing dividends is steeped in the fact that it takes a lot of money and investment to operate a tech company, and cash on hand needs to be used for product development and acquisitions.
Big, maturing businesses
But in the case of Alphabet and Meta, there may be more to it, Wedbush Securities analyst Scott Devitt told CNET. He said Meta's and Alphabet's reversal on dividends suggests they each "have excess cash above and beyond the needs for their businesses." And perhaps most importantly, they've now matured to a point where issuing dividends makes sense.
"They are dominant, maturing, high cash flow producing businesses," Devitt said. "Plus, it opens up the stock to investors that have a dividend mandate."
Indeed, one of the biggest complaints some investors levy against tech companies is that they're focused solely on growth. And for investors who desire annual returns, tech companies like Meta and Alphabet have been nonstarters. Attracting those investors now could not only bring in a new pool of shareholders, but also increase the share price to benefit existing investors.
Looking ahead, it's unknown when other companies, like Amazon, which is reporting earnings on Tuesday, might join the crowd and issue dividends. But Devitt believes it's only a matter of time before others follow Meta's and Alphabet's lead.
"We would expect this trend of tech companies issuing dividends for the first time to continue for large, maturing, high cash producing tech businesses," Devitt said.
