Following a volatile start to the decade, the bulls are, once again, running wild on Wall Street. Despite a modest pullback, investors have witnessed the ageless Dow Jones Industrial Average, benchmark S&P 500, and growth-powered Nasdaq Composite jump to record-closing highs within the last five weeks.
While there have been pockets of strength in a variety of sectors since this new bull market took shape, the Magnificent Seven have done the lion's share of the heavy lifting.
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The Magnificent Seven are long-term outperformers with well-defined competitive advantages
The Magnificent Seven are seven of Wall Street's largest and most-influential businesses. Listed in descending order by market cap, as of the closing bell on April 26, the Magnificent Seven stocks are:
- Microsoft (MSFT -0.49%)
- Apple (AAPL 0.06%)
- Nvidia (NVDA -0.29%)
- Alphabet (GOOGL 0.97%) (GOOG 0.89%)
- Amazon (AMZN -1.27%)
- Meta Platforms (META -1.73%)
- Tesla (TSLA 0.49%)
Aside from all seven of these companies crushing the S&P 500 in the return column over the trailing decade, their lure, from an investment standpoint, is their competitive advantages and/or seemingly impenetrable moats.
- Microsoft is leveraging the old with the new. Windows is still the world's leading operating system for desktops, while Azure is the global No. 2 cloud-infrastructure service platform.
- Apple's calling card to success has long been its iPhone, which accounts for more than half of U.S. smartphone market share.
- Nvidia's graphics processing units (GPUs) are expected to make up in the neighborhood of 90% of the GPUs deployed in high-compute data centers this year.
- Alphabet's Google comprised more than 91% of global internet-search share in March, while streaming service YouTube is the second most-visited site in the world.
- Amazon's online marketplace is No. 1 in the U.S., with an estimated 37.6% of domestic online retail share in 2023. Meanwhile, Amazon Web Services (AWS) is the world's leading cloud-infrastructure service platform.
- Meta Platforms owns the top social media sites globally, including Facebook, which attract more than 3.2 billion daily active users.
- Tesla is North America's leading electric vehicle (EV) manufacturer and the only pure play EV maker that's generating a recurring profit.
But there's a new draw to the Magnificent Seven that didn't exist when 2024 began: Most of these companies now pay a dividend.
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Five of the Magnificent Seven stocks pay a regular dividend to their shareholders
When most investors think of the Magnificent Seven, they probably envision Wall Street's steadiest growth stocks. With these businesses aggressively reinvesting their operating cash flow into high-growth segments and innovations, collecting dividend income is likely an afterthought.
However, operating cash flow has been so robust for most of these companies that paying a regular dividend can be done without hampering their innovative capacity in any way.
Entering 2024, three Magnificent Seven constituents had been paying a dividend to their shareholders for years.
- Microsoft has been paying a continuous quarterly dividend since September 2004 and has seen its payout grow by more than 800% since its dividend program was first initiated.
- Apple reinstated its quarterly-dividend program in the summer of 2012 and has increased its payout by 154% in under 12 years.
- Nvidia has paid what currently amounts to a token dividend ($0.04 per quarter) dating back to the summer of 2013.
In February, Meta Platforms joined the party when its board introduced a $0.50 per-quarter distribution. Even with aggressive investments in artificial intelligence (AI), augmented and virtual reality devices, and the metaverse, Meta closed out the March quarter with $58.1 billion in cash, cash equivalents, and marketable securities, and it generated over $19.2 billion in net cash from its operations during the quarter. It has the balance sheet and capital to support a continuous payout to its shareholders.
Last week, Alphabet became the newest member of the club. The parent of internet search engine Google, streaming platform YouTube, and now-profitable cloud-infrastructure service platform Google Cloud, initiated a $0.20 per-quarter dividend. Alphabet ended March with over $108 billion in cash, cash equivalents, and marketable securities, and generated an astounding $28.8 billion in net cash from operations in the first three months of the new year. It can easily absorb this annual payout while fueling its cloud and AI-driven ambitions.
Later today, Tuesday, April 30, a sixth member of the Magnificent Seven has an opportunity to join the club.
Is this the newest dividend-paying Magnificent Seven stock?
Last week, Tesla's operating results made it plainly evident that it won't be doling out a dividend anytime soon to its shareholders. Tesla endured a free-cash outflow of $2.53 billion during the first quarter, with EV competition heating up and multiple rounds of price cuts wrecking the company's operating margin. Selling a commoditized product in a cyclical industry might make it difficult for Tesla to ever pay a dividend.
The Magnificent Seven component that could become the newest dividend paying stock in mere hours is Amazon -- the company is slated to report its first-quarter operating results after the closing bell today.
With Amazon stock trading at a multiple of 62 times trailing-12-month earnings, you might be quick to dismiss the likelihood of the company doling out a dividend to its shareholders. However, Amazon's balance sheet, and its three ancillary operating segments that are bona fide cash machines, suggest it can become the next income stock.
When the curtain closed on 2023, Amazon was sitting on a treasure chest of nearly $86.8 billion in cash, cash equivalents, and marketable securities. More importantly, net cash provided by operating activities soared to nearly $85 billion in 2023 from $46.8 billion in the previous year. By 2027, Amazon's three higher-margin ancillary segments -- AWS, advertising services, and subscription services -- are expected to more than double the company's 2023 operating cash flow.
Although advertising can be cyclical, Amazon's operating cash flow is fairly insulated against downturns in the U.S. and global economy. While e-commerce generates most of its revenue, the online marketplace is a low-margin segment. The predictability of subscription-services revenue, coupled with enterprise cloud spending still being early in its ramp, all but ensures that Amazon will have more capital than it'll know what to do with.
Don't overlook peer pressure as a catalyst, either. With Meta and Alphabet introducing a dividend over the last three months, Amazon may have little choice but to follow suit in order to maintain its seat at the table among America's most-influential businesses.
