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A Hidden Catalyst for Google and Amazon Shares

In the last few years, we have seen the emergence of a small group of technology companies that have dominated the landscape and the stock market.

We are sure you are familiar with the name that has been bestowed on these companies – "The Magnificent Seven."

(Reminder – the name is a direct play on a great Western film from 1960 starring Yul Brynner, Steve McQueen, Charles Bronson, and a host of other great stars.)

We have written often about these companies in the last few months. They are important because they represent a significant portion of the market capitalization of the S&P 500. As of right now, they are almost 30% of the total.

The emergence of these companies is no fluke. It is not a reflection of an expansion in valuation or a "bubble."

These companies have risen to this position due to excellent operating performance. They have shown massive earnings growth, significant competitive positions, and spectacular balance sheets.

We posted this the other day on Twitter…

Most of these companies are going to be reporting this coming week, and it got us thinking about the upside for these companies going forward.

Our first inclination is that they have less upside going forward than looking backward. This is just math.

It is much harder for a $1 trillion market cap company to go to $10 trillion than for a $10 billion company to go to $100 billion.

That doesn’t mean you shouldn’t own them. It just depends on your investment goals and where you would put these as holdings.

We think that their dominant positions are likely to persist, and they will continue to grow in the next decade. That will result in the stocks continuing to move higher.

As we were looking through them the other day, though, we noticed something interesting…TWO of these stocks do not pay a dividend.

Both Amazon.com, Inc. (NASDAQ: AMZN) and Alphabet Inc. (NASDAQ: GOOG) don’t pay one.

(Note – Tesla Inc. (NASDAQ: TSLA) doesn't pay one either, but at this point, we think we should be thinking about the "Sexy Six" given Tesla's other issues…)

The dividend payouts on the other companies are not very large. Here is a table with all the data…

You can see that the dividend yields that are paid are negligible. The yield on NVIDIA Corporation (NASDAQ: NVDA) is just 0.02%!

Why even bother?

One reason is that there is a significant group of investors that will only buy companies that pay dividends. We don’t know what percentage of the total number of investors out there this is, but it could be double digits.

There is a small catalyst: if Amazon and Google paid dividends, these investors might be forced to buy the stocks as part of their benchmark. We doubt this would do much for the shares, but it wouldn't hurt.

The more significant reason is the signaling to investors about the view on the return of capital to shareholders.

For many years, these companies have not paid out dividends (or repurchased stock) as they looked at their businesses as high-growth opportunities where the capital could be better deployed.

Their businesses still have significant growth opportunities, but now they have more than enough capital.

GOOG has $110 billion in cash and generates $70 billion in free cash flow per year. AMZN has $86 billion and produces $35 billion of free cash flow.

Both companies are still heavily investing and have underlying businesses – advertising and commerce – that can be economically sensitive.

We understand why management might want to be prudent and not commit to paying out all of their cash as dividends.

We think, however, that paying out SOME makes a lot of sense!

Some of you might ask – why pay out anything as dividends versus buying back the stock? Aren't stock buybacks more tax-efficient?

They are right now. The US government, though, looks to be potentially changing that through the tax code, but we still think it will be valid.

We think they should still do it, though, because it DOES cement their commitment to capital return to shareholders.

If you look back at the historical track record of the "Dividend Aristocrats" – these companies have grown their dividend for 25 consecutive years – it is incredible!

We think that the "new money" of the stock market should soon step up and join this aristocracy.

This will be the next leg up for these stocks across the next few decades.

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