7 months ago
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For investors, dividend-paying stocks offer an immediate return, and those with consistent, rising payouts have performed even better, with less volatility than the benchmark S&P 500. One explanation could be that annual dividend increases compel management to maintain disciplined capital allocation while also signaling strong confidence to investors in the company's future growth.
Let's dive into two dividend-paying stocks, priced at a combined $500, that appear undervalued and either recently began paying dividends or have a strong history of increasing them.
1. Alphabet
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is down approximately 5% over the past month as the tech giant faces increasing calls for regulation in its search and advertising business. Additionally, investors fear Alphabet may be behind in the artificial intelligence (AI) arms race against competitor Microsoft, which owns a significant stake in Open AI, the company behind ChatGPT.
While long-term trepidation may be holding down the stock price, Alphabet's business is generating more revenue and profit than ever before. Through the first half of 2024, the company generated $165.3 billion in net sales and $47.3 billion in net income, representing a year-over-year increase of 14.5% and 41.5%, respectively.
Alphabet's balance sheet shows that as of its most recently reported quarter, the company held $88.9 billion in net cash. The excess cash likely gave management confidence to initiate its first-ever dividend earlier this year. The company currently pays a quarterly dividend of $0.20 per share, equating to an annual yield of 0.53%.
Notably, Alphabet's payout ratio -- the percentage of a company's income paid out as dividends -- is incredibly low at 2.8%, meaning management will have plenty of room to raise its dividend in the future.
Management also returns capital to shareholders through share repurchases, which increase investors' ownership stakes without requiring additional purchases. In the first half of 2024, Alphabet spent $31.4 billion on share buybacks, lowering its outstanding shares by 1.2%. Given that Alphabet's outstanding share count has decreased 10.9% over the past five years, and it announced a new $70 billion share repurchase in April, it looks as if management will continue to prioritize this capital allocation method for its shareholders for the foreseeable future.
Returning to the perceived threat to Alphabet's business, management understands the significance of AI and is pouring cash into the transformative technology. CEO Sundar Pichai underscored Alphabet's investments into AI on the company's most recent earnings call, adding, "The one way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here."
