Want to score some super-sized dividends as the S&P 500 goes sideways? There are a billion lessons to be learned when investors turn their dividends into serious cash flow.
Five investors, including Walton Enterprises, ETF giant Vanguard Group and tech magnate Lawrence Ellison, each rake in $1 billion or more annually — yes, a billion — from dividends alone as top holders of S&P 500 stocks. They’re living proof of how dividends can be part of a wealth-building strategy if you focus in the right places. And they also emphasize that even if you only own ETFs, and not individual dividend-paying stocks, you are part of the dividend gravy train.
“The current working view for S&P 500 dividends remains positive, with expectations of a record payment for 2023,” said Howard Silverblatt of S&P Dow Jones Indices.
S&P 500 dividends offer a boon if you go big
Earning a huge dividend isn’t just about chasing big returns – just look at the Walton Family’s family office: Walton Enterprises. If you’re looking for big dividends, you can learn an important lesson from Walmart’s founding family.
The private investment firm rakes in $2.3 billion in dividends annually from its position in Walmart, which is the largest payout to any top S&P 500 stockholder. But the huge dividend for Walton Enterprise isn’t due to the stock’s massive yield. Just the opposite. Walmart yields just 1.4%, which is identical to the return on the S&P 500. The key is the size of the position. Walton Enterprise owns a huge position in the stock, giving it 37% of the company.
The takeaway isn’t the financial value of being part of the Walton family (which would be nice). It’s about the importance of giving up the blind race for stocks with the highest returns. Many high-yield stocks in the S&P 500 end up being more trouble than they’re worth. If dividends are your thing, finding a solid position that you can maintain and build upon is how dividend wealth is earned.
It’s the same trick that works for Oracle founder Ellison. Oracle’s stock yield isn’t that impressive at 1.4%. But if you own a large position – Ellison owns 42% of Oracle – you’re looking at a serious dividend check.
Keep this in mind if you have uninvested money in your investment account. By simply putting a large portion of your portfolio in the S&P 500, you can build serious wealth from dividends. In fact, dividends alone have accounted for 38.3% of the S&P 500’s 10.3% annual total return since 1926, Silverblatt found.
You score with dividends even if you don’t know it
Vanguard’s increasing influence in the field of investing ensures that a lot of dividend money ends up in the pockets of investors. And it shows how simply owning ETFs will give you a slice of dividend payout.
Half of the largest annual dividend payouts from S&P 500 stocks go to Vanguard and its investors, who have poured trillions into the company’s funds. Vanguard’s position in Microsoft alone generates nearly $1.8 billion in annual dividends. This is remarkable given that the software giant only yields 0.8%.
And again, Vanguard isn’t just chasing stocks with the highest returns. It’s playing the long game and building big positions in key S&P 500 stocks. It brings in $6.6 billion annually by investing heavily in five stocks besides Microsoft: ExxonMobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ) and JPMorgan Chase (JPM).
And data shows why this works. S&P 500 companies now pay more than $140 billion per quarter in dividends, Silverblatt says. By simply owning the market, you are putting your hand in this lucrative pot.
And the pot continues to grow. Just this year, nearly 200 S&P 500 companies started paying or increased dividends. And such new payouts are a key reason why S&P Dow Jones Indices thinks 2023 cash payments will rise about 5%. Keep in mind that 80% of S&P 500 companies pay a dividend. That leaves 20% to start one. And it also means there are many companies that could increase what they pay to keep up with rising stock prices this year.
However, big yields can pay off
Most big dividend winners don’t chase yield. The average return on the top ten stocks that make the most money is just 2.4% – which is higher than the S&P 500 – but not huge.
But there is one important exception that the world is pointing to: the S&P 500 tobacco company Philip Morris International (P.M). Capital Research and Management, the investor better known as the manager of the American Funds, is acquiring $1.4 billion per share from the tobacco company. Capital Research is the number 1 holder of Philip Morris shares with almost 18% of the shares outstanding. But the real reason for the huge payout on these stocks is the outrageous 5.4% dividend yield.
Still, chasing rising returns on a falling stock price is no money – an often recipe for disaster. Philip Morris is actually a stable free cash flow machine.
Philip Morris generated free cash flow of $7.4 billion over the past twelve months. And it doesn’t plan to conserve its cash, as so many S&P 500 companies do. The company’s payout ratio in the last twelve months was 97.9%, meaning it is paying out almost every penny of what it earns. That may not bode well for dividend growth, as the dividend is already being maximized. But the company’s revenue is remarkably stable, meaning the dividend looks solid. Philip Morris’ sales are now 12% higher than five years ago.
So don’t feel bad if your last name isn’t Walton or Ellison. If you want to grab your share of the dividends, they are there for the taking.
Investors earn $1 billion or more annually in dividends
Among the No. 1 holders of S&P 500 stocks
|Company||Ticker||Holder on top||Annual div ($ billions)||Yield||Sector|
|Walmart||(WMT)||Walton Companies||$2.3||1.38%||Consumer goods|
|Microsoft||(MSFT)||Vanguard Group||$1.8||0.82||Information Technology|
|Oracle||(ORCL)||Lawrence J Ellison||$1.7||1.40||Information Technology|
|Philip Morris International||(P.M)||Capital research and management||$1.4||5.43||Consumer goods|
|Broadcom||(AVGO)||Capital research and management||$1.3||2.16||Information Technology|
|Apple||(AAPL)||Vanguard Group||$1.2||0.55||Information Technology|
|Morgan Stanley||(MRS)||Mitsubishi UFJ financial||$1.2||3.85||Financial details|
|Johnson & Johnson||(JNJ)||Vanguard Group||$1.1||2.95||healthcare|
|JPMorgan Chase||(JPM)||Vanguard Group||$1.0||2.69||Financial details|
Source: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter (X) @matkrantz
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