One of the world's largest technology growth stocks has finally begun to return cash directly to shareholders. That's right, after piling up cash on its balance sheet for years, Alphabet (GOOG 1.31%) is now paying a small quarterly dividend. So rejoice, income-focused investors: Another high-quality technology company has become an option for your portfolios.
But don't think the owner of Google Search and YouTube is done growing. Alphabet now looks like the perfect buy-and-hold stock for both dividends and growth.
Alphabet: The next big dividend payer
In conjunction with its first-quarter earnings report this spring, Alphabet announced it would begin paying a $0.20 per share dividend each quarter, or $0.80 per share annually.
Today, that doesn't amount to much relative to the share price. With the stock at $150, Alphabet's yield is around 0.5%. However, given how many shares of Alphabet there are outstanding, this amounts to an annualized total payout of close to $10 billion. Not a bad start for its first dividend payment.
Other technology giants such as Apple have grown their payouts significantly as their businesses matured. Apple has boosted its dividend at an annualized rate of 8% since 2014 -- though its stock has grown faster, particularly in the past four years, so its yield is still fairly low.
Plenty of room for payout growth
Alphabet may be beginning its dividend-paying era at a low yield, but it has plenty of room to follow in Apple's footsteps and grow its dividend consistently over the next 10 to 20 years.
Free cash flow per share is the lifeblood of a dividend payment. No cash flow, no dividends -- It's that simple. Alphabet's free cash flow per share is $4.80, which is 6 times its current annual dividend per share. This means Alphabet could grow its dividend by a factor of six even if its free cash flow goes nowhere.
However, it's unlikely that Alphabet's business will stop growing. The company has dominant positions in search and consumer internet platforms such as YouTube. Revenue is still growing at a double-digit percentage rate, even with over $300 billion in annual sales, and has grown at an 18% annualized rate over the last 10 years. Free cash flow per share has grown at an average of close to 20% each year. Even if this growth eventually slows down to under 10%, Alphabet should have growing cash flows coming in that can fuel dividend payout growth.
Lastly, Alphabet is a repurchaser of its own stock, which brings down its total shares outstanding. This will allow the company to grow its dividend per share at a greater clip, as it will be splitting its total payouts among fewer and fewer shares. This is a good thing for shareholders who hold for the long term.
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Should you buy Alphabet for dividend growth?
Alphabet has a fantastic long-term track record of financial performance. It is one of the largest and most profitable companies in the world, and keeps growing sales at impressive rates each year. Its current dividend yield is a measly 0.5%, but the stock is not expensive. The current price-to-earnings ratio (P/E) is 22, which is below the S&P 500 index's average of 29. And Alphabet is growing its earnings at a much faster pace than the average company.
My hunch is that Alphabet's dividend per share will grow at a double-digit percentage rate for the next 10 years. At least, management will have plenty of firepower to make that happen with how fast free cash flow per share is compounding. So while the starting yield is low, income investors would be smart to hop on the Alphabet dividend growth train right now.
