A pattern of steady dividend payments and dividend increases is only possible if a business can generate enough cashflows to support operations and expansion, while also generating torrents of excess free cash flows.
That dividend provides signaling value to shareholders that there are indeed solid and dependable cashflows to support it. Those cashflows are also supported by the business.
In fact, in the old days (prior to the 1980s), investors would not touch a stock that didn't pay a dividend. The idea was that a company which does not pay a dividend simply cannot afford to pay it. It was a speculative company that typically didn't earn much money.
Since the days of the 1990s and the tech bubble, investors have been shunning dividends, and focusing only on the share price. It takes a few bear markets to remind investors that trees do not grow to the sky.
At some point, a stable dividend generated from a good business can be a major calming force during a bear market or an extended flat market. For a company that generates a ton in cashflows, it makes little sense not to pay a dividend. Dividends provide management with focus on the projects with the highest return on investment. Having that focus and a hurdle rate, coupled with a regular commitment to shareholders, makes it less likely that management teams would do something silly with the money. A stable and growing dividend also signals maturity and stability in cashflows.
When management teams are swimming in cash, they could focus on projects of dubious value, get more perks like corporate jets, and other silliness. That dividend provides focus and discipline to the capital allocation process.
Over the past several weeks, there were several notable dividend initiators.
Those include:
Meta (META), which initiated a quarterly dividend of $0.50/share in February.
Booking Holdings (BKNG), which initiated a quarterly dividend of $8.75/share in February.
Salesforce.com (CRM), which initiated a quarterly dividend of $0.40/share in February.
It would be interesting to see if these companies manage to grow those dividends from here as well.
It seems as if companies are finally wisening up and sharing their generous cashflows with shareholders.
I would welcome seeing more tech juggernauts that can afford to pay a dividend actually starting to pay dividends. One that's long overdue is Alphabet (GOOG).
It would be interesting to see if number of payers on the S&P 500 increases as well. These are the trends we are witnessing as of this year:
On a side note, this increase in number of dividend paying companies, particularly in the tech sector, is not new. We saw that a little over a decade ago. Please check the relevant articles below: