Many technology companies pay dividends, or regular cash distributions from earnings, to their shareholders. Alphabet (GOOGL), the parent company of Google, isn't one of them.
A dividend payment that's held steady or increased over time can be a sign that the company is doing well financially. To put it bluntly, a company paying dividends has excess cash to distribute.
Historically, dividends were one of the main reasons investors bought stocks. The stock represented an ownership stake in the company and the dividends were the owners' share of the profits.
Generally, companies paying consistent dividends tend to show stable financial performance and a steady flow of revenue. A steadily rising payout can attract investors by showcasing growth and stability, which may in turn result in a higher share price.
Proponents of dividend payments by Google's parent company argue it can do so without jeopardizing its financial stability. Alphabet reported revenue of nearly $258 billion and net income of $76 billion for fiscal 2021, while free cash flow in the fourth quarter of that fiscal year alone topped $18 billion.
The Downside of Dividends
Adherents of dividend irrelevance theory argue dividend payments should not affect the price of a company's stock. Dividends simply transfer investors' collective claim to the company's cash to their individual accounts without fundamentally altering the company's value, they note. Investors can always replicate the effect of dividends by selling some of their stock, the reasoning goes.
Some dividend critics go further by pointing out they are subject to double taxation—once as corporate earnings and again as personal dividend income. This tax inefficiency of dividends has often been given as one reason for the growth of share repurchases by public companies.
Why Alphabet Doesn't Want to Pay Dividends
Alphabet's financial performance clearly shows it is capable of paying dividends to stockholders. The question then becomes: Why doesn't Google's parent company want to pay dividends? The answer may be found in Alphabet's mission statement. It begins:
As Sergey and I wrote in the original founders letter 11 years ago, “Google is not a conventional company. We do not intend to become one.” As part of that, we also said that you could expect us to make “smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.” From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have.
At the core of what Alphabet does is constant evolution and expansion into new ventures. This is most apparent in its Google X division, what the company calls its "moonshot factory." As of February 2022, Google X projects in development included industrial robotics, artificial intelligence to grow more food for the planet, underwater camera systems for ocean farmers, an autonomous delivery drone service, and much more.
Rather than pay dividends, the company could always reinvest its profits to fund more such projects.
Big Tech Companies That Pay Dividends
Many big companies in the technology industry pay regular dividends to stockholders. Here are some of them and their dividend yields, as of February 2022:
- Apple Inc. (AAPL): 0.5%
- Cisco Systems, Inc. (CSCO): 2.67%
- Intel Corp. (INTC): 2.84%
- International Business Machines Corp. (IBM): 4.91%
- Microsoft (MSFT): 0.8%
- Oracle (ORCL): 1.58%
A Dividend in the Future?
Because of its mission to be different than conventional companies and its rapid growth, it is unlikely that Alphabet will cave and pay dividends just because its competitors do. But you never know—people once thought that Apple would never pay a dividend.