This Is the Next "Magnificent Seven" Stock to Pay a Dividend (and It Could Be the Biggest of the Bunch)

The "Magnificent Seven" stocks aren't exactly know for their dividends but rather for their growth. But if a company's payout can grow by double digits for a large number of years, investing in leading tech growth stocks today could yield some impressive retirement income decades down the road.

What could be even more lucrative? If you own a high-growth stock that begins to start paying a dividend after you've owned it for a number of years. When this fortunate event happens, one has probably already seen a large appreciation in the stock, so even a small nominal yield can amount to a substantial payout relative to one's initial investment.

Of the three remaining Mag Seven stocks that don't pay a dividend, I'd say it's a pretty solid bet which one will be next. Not only that, but its potential payout could offer the highest yield of the group when it begins.

Alphabet is a cash cow that should really pay a dividend

With exception of perhaps Apple and Microsoft, Google parent Alphabet is the Magnificent Seven stock with the greatest capacity to pay a dividend -- and yet it doesn't.

In 2023, Alphabet generated a massive $74 billion in net income, which is the third highest profit figure of the Mag Seven. And if one takes out the $4.1 billion in operating losses from Alphabet's "other bets" segment consisting of moonshot projects, Alphabet would have come very close to Microsoft's $82.5 billion profit over the past 12 months.

Looking at all the dividend-paying Mag Seven stocks side by side, it seems apparent Alphabet is rather overdue for a dividend.

Data source: Yahoo! Finance.

Not only does Alphabet have the earnings power to pay shareholders a dividend, but it also has the biggest balance sheet cushion of any Mag Seven company. As of December, Alphabet had a whopping $111 billion in cash against just $13 billion in debt. That's actually the highest level of net cash in the group. The next most cash-rich company is Apple. Although Apple has a higher level of total cash and securities at around $173 billion, it also had a higher debt load, at around $108 billion.

To its credit, Alphabet has been returning cash to shareholders via share buybacks. In fact, Alphabet returned nearly all of its net income to shareholders through buybacks last year, retiring $71 billion of its stock, including offsets for share compensation.

But all of the Magnificent Seven stocks are also repurchasing a fair amount of stock, with most (except Microsoft) paying more in share repurchases than dividends. And with Alphabet's closest peer, Meta Platforms, just initiating its first dividend last month, Alphabet may be running out of excuses in holding out.

Some may find it may be appropriate for Alphabet to stick with 100% repurchases for now. After all, Alphabet is currently the cheapest of all the Magnificent Seven stocks on both a P/E and forward P/E basis. And the cheaper a stock is, the more accretive share repurchases are, with the ability to retire more shares.

GOOG PE Ratio data by YCharts

That being said, even using 100% of its earnings for repurchases would retire only about 4.5% of Alphabet's stock this year. Whereas using Microsoft's payout ratio would give shareholders a 1.1% dividend yield. That would be the highest among the Mag Seven and wouldn't be a bad yield at all for an AI-fueled tech stock. It could also open up Alphabet to a larger pool of investors, attracting dividend-focused mutual and index funds.

Reasons to not pay a dividend

Of course, Alphabet management may be hesitant to begin paying a dividend at this point. After all, the stock has lagged other Mag Seven names based on fears that generative artificial intelligence could pose a threat to its core search business.

I think that fear is misplaced, as we're still in the early innings of the AI era, and Alphabet has recently upped its game with an upgraded version of its in-house large language model called Gemini 1.5. According to the company, the new Gemini model can understand more video, text, audio, and computer code in an instant than the latest version of ChatGPT-4. In fact, it was recently rumored that Apple is in talks to license Gemini for iPhones, much in the way Apple already has Google as the default search engine on iPhones.

Yet while there are positive signs Alphabet's AI products are gaining traction, the buildout of Gemini, Google Cloud, and general AI capabilities will take lots of capital. Therefore, Alphabet may be in for an aggressive spending cycle to capture the AI opportunity that may necessitate management holding off on paying a regular dividend at this point in time.

Still, the buildout of AI infrastructure and the Metaverse investment didn't prevent Meta from starting its own dividend. Two years ago, Meta management was criticized for overspending, so the new nominal payout was perhaps a gesture to shareholders that Meta will remain disciplined in its investments.

Alphabet has also been criticized as perhaps being a bit bloated in terms of its employee count and spending on various "moonshot" tech projects. So, the initiation of a dividend could go a long way in changing that perception for Alphabet as well.

A dividend is probably coming at some point

Once Alphabet management believes its AI offerings have gained sufficient traction, I would expect the company to perhaps begin a quarterly payout.

While it may not happen in 2024, investors in Alphabet today are likely to see a growing payout beginning sometime in the next few years.