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Life is full of a series of “firsts,” many of which are ultimately unforgettable and many of which are derived from familial and personal relationships.
Romantic firsts usually top those lists. Regardless of our gender and sexual orientation, events such as a first kiss and first love are, broadly speaking, easy to remember. Psychology supports the notion that first loves are often remembered over a lifetime because they occur at young ages when the sensory parts of our brains are sharpest.
Of course, as people mature, they discover that first isn’t always “best” in romance. Sure, it’s possible that someone’s first love will be their true love, but it’s also likely and more probable that a true love might be the second, or third (or more) person we say “I love you” to.
Alright, I’ve got a point here and it’s not romantic advice. Rather, it’s about dividends, specifically initiations. First dividends are something of a talking point these days after Facebook parent Meta Platforms (NASDAQ: META) recently announced its first payout.
Why First Dividends Matter
In previous market regimes, there were times when a high-growth company such as Meta initiating a dividend may have been frown upon on the basis that the firm in question was perhaps signaling to investors it lacked for growth opportunities.
Fortunately, times change. Looking at two longer-ranging examples, the returns offered by Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) following payout initiations are nothing short of life-changing. Looking at Meta, the stock has continued soaring since its dividend announcement.
That’s not surprising because history confirms, regardless of industry, first-time dividend announcements bring near-term gains for investors of the company delivering the news. In other words, initiated payouts by growth firms aren’t the drags they’re believed to be.
“In aggregate over the last 20 years, companies announcing their inaugural cash dividends provided an 0.8% return in excess of the S&P 500 Index in the week following the announcement, while having an 8.4% excess return during the year following this announcement,” observes Michelle Cluver of Global X. “But these high-level figures brush past the trends in how markets have rewarded this initial dividend payment. On average, companies that started to pay dividends in 2022 and 2023 experienced the highest one-year excess returns for companies declaring their inaugural dividend since 2000 and 2001.”
There’s another side to the story and it might explain why cash rich Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) are among the 20% of S&P 500 member firms that don’t pay dividends.
“Focusing on the 20% of the S&P 500 Index that has never paid a recurring cash dividend, these companies have on average outpaced the broader market over a five- and ten-year horizon,” adds Cluver. “While interesting, investors are likely to note the dramatic change in the yield environment over the last two years, as higher interest rates prioritized cash flows and dividends.”
Two Sides of Dividend Initiation
As has been outlined here, dividend initiations are helpful, even to growth stocks, but the Alphabet’s and Amazon’s of the world are doing just fine and right by investors even without payouts.
Interestingly, of the top 10 S&P 500 member firms, only the two share classes of Alphabet, Amazon and Berkshire Hathaway (NYSE: BRK-B) don’t pay dividends. Perhaps unbeknownst to some advisors and many investors, even Nvidia has a small payout.
Of that trio, Berkshire Hathway is the one that probably “should be” a dividend payer because it doesn’t have significant research and development expenditures and Warren Buffett has long embraced dividend stocks. However, he’s scoffed at the notion, telling investors to simply sell the stock if they want a dividend. So with Meta now a dividend payer, the waiting game turns to Alphabet, Amazon and perhaps Tesla (NASDAQ: TSLA).