How the humble dividend might rise again

Shareholders in Meta are about to start receiving a dividend for the first time. Most of them probably won’t notice. Investors will receive a piddling 50 cents per share each quarter, starting next month. Given the prevailing share price of the social media monster, this equates to an annual dividend yield of just 0.42 per cent. This sounds tiny. It is tiny. But this particular form of microdosing sent out a big signal, for the company and potentially for the wider market.

Meta encapsulates the grinding decline in dividend culture in US equity markets over the past two decades. Few of its shareholders will have missed these disbursements over the past 10 years, during which its publicly traded stocks have delivered gains of almost 700 per cent. Instead, share buybacks have provided the primary way to return capital to shareholders — Meta bought back more than $90bn worth of stock from 2021 to 2023 and intends to buy much more, at a pace that far exceeds the scale of the new dividend payouts. 

But the message matters. Analysts welcomed the move as a “coming of age” and a signal that Mark Zuckerberg’s empire would tilt in favour of staid, sensible rewards for shareholders over ventures in the metaverse. 

A century ago, companies paid a dividend even at the point of listing on the stock market, as Daniel Peris, a specialist dividend-focused investor at Federated Hermes, explains in his new book The Ownership Dividend. It was considered an integral part of the investment process, and for decades afterwards, the biggest signal came from a failure to pay out — often seen as an outright sign of financial distress.

Those that pay dividends have tended to stick to them in all but the most dire of circumstances (such as the Covid-19 era), providing a steady income stream for equity investors whatever the performance of the share price itself. But the anything-goes low interest rate world created a “hostile environment” for this investment style, Peris says. 

Today, about 70 per cent of companies in the S&P 500 stocks index pay a dividend, but generally a slender one. In the US, yields have largely been stuck under 2 per cent for two decades — a nadir only partly explained by taxes. On the tech-heavy Nasdaq index, only about 40 per cent of companies paid a dividend at all by the end of 2022, leaving the median yield at zero, Peris notes. The practice has simply fallen from convention, especially among ambitious tech companies that plough earned dollars back into growth and development, and especially in the US.

As long as stocks always go up, and, importantly, as long as bonds put up a feeble fight for investment dollars with their own low yields, this arguably does not matter. But dividend enthusiasts argue this is starting to change now that money has a cost again. Meta’s new small offering bolsters their case.

Already, ignoring dividends gives a faulty impression of investment returns. If you include them — better representing the real-world experience of holding shares — the global hierarchy of top-performing equity markets gains a curious new tinge. Last year, for example, the S&P 500 gained 26 per cent on a total return basis — a couple of percentage points above basic price gains in the index. Italy’s FTSE MIB, meanwhile, gained a stonking 39 per cent on a total return basis in dollars. Dividend yields there now stand at more than 4 per cent.

This level of payouts has a profound impact on investor mindset, says Hans-Jörg Naumer, global head of thematic research at Allianz Global Investors in Frankfurt. “As investors we are not purely rational. Investing feels like a loss,” he said. “An income stream helps to overcome that feeling.”

This path is not smooth. In 2022, the dire performance of largely low- or zero-dividend stocks provided a boost for investors like Stuart Rhodes, who manages the M&G Global Dividend Fund. As the usual high-growth low-payout tech stocks struggled, “the market seemed to accept that period was over”, he said. “It was a useful reminder that you can have long periods when the same thing works, but nothing works for ever.” 

Last year was again humbling. The scorching ascent of the small clutch of low-dividend tech stocks known as the Magnificent Seven again put off a lot of investors who hopped on to these easy gains. “We had a quiet year,” said Peris. For him the dream is that now bonds bear higher yields and are a more alluring bet, companies will routinely place a predictable layer of dividends on their stocks to keep investors sweet.

A return to the lavish dividend days of a century ago is unlikely, but Meta’s example suggests the message still rings a bell in the back of investors’ brains.

katie.martin@ft.com