In this latest earnings season, several tech companies have either unveiled dividend initiations or hikes – and that’s providing income investors with a solid opportunity, according to Charlie Gaffney, managing director at Morgan Stanley Investment Management. “There is a potential new wave of activity taking place that hasn’t happened in the past as it relates to the higher growth tech space,” Gaffney, who is also portfolio manager of the Eaton Vance Dividend Builder Fund (EIUTX) , told CNBC. “I think it’s going to create great opportunities for folks who want dividends as part of their total return profile.” In particular, three tech names have caught the dividend investor’s attention as they announced the initiation of these payments: Meta Platforms , Salesforce and Booking Holdings . A tech trio “We saw three major high-profile tech-based businesses that have just initiated,” he said. Growing, rather than maintaining the dividend is the next big step for tech companies kicking off these payments. “That’s the other aspect we are excited about, based on cash flow and fundamentals, that there is a strong likelihood they will be able to raise the dividend over time.” Last month, Meta announced it would issue a cash dividend of 50 cents per share, payable on March 26 to shareholders of record as of Feb. 22. The news came out alongside stronger-than-expected quarterly earnings, as well as an announcement that the company would boost its share repurchase by $50 billion. “When you have $60 billion to $70 billion of cash on the balance sheet and limited amounts of debt, there’s an opportunity to initiate a dividend – and they did that,” Gaffney said. Indeed, Meta reported that it had $65.4 billion in cash, cash equivalents and marketable securities as of the end of last year, as well as free cash flow of $43 billion for the full year 2023. About 85% of analysts rate Meta a buy or a strong buy, but they see less than 4% upside from here, per LSEG. Shares are up 37% in 2024, and the dividend yield is 0.4%. Salesforce is the second company Gaffney called out. The business software company posted a beat on earnings for the fiscal fourth quarter at the end of February. Salesforce’s board declared a cash dividend of 40 cents per share, payable on April 11 to stockholders of record as of March 14. The company also increased its share buyback play by $10 billion. Salesforce reported $10.2 billion of cash generated from operations for its 2024 fiscal year, and free cash flow of $9.5 billion. Shares are up 16% year to date, and the dividend yield is 0.5%. In all, about 72% of analysts covering Salesforce say it’s a buy or a strong buy, and the average price target suggests about 5% upside from here, per LSEG. Finally, Booking Holdings is the third company that caught Gaffney’s attention. In late February, the travel company’s board declared a quarterly cash dividend of $8.75 per share, payable on March 28 to stockholders of record as of March 8. The payment comes out to a dividend yield of 1%, and the stock is down just over 1% in 2024. Nearly two-thirds of analysts covering the stock deem it a buy or a strong buy, and the average price target implies 12% of upside, according to LSEG. Watching for dividend initiators “It’s a pillar of our process to find companies that grow dividends over time,” said Gaffney. “Those that can consistently grow dividends at an above average rate have outperformance characteristics versus the overall market.” Alphabet has been on Gaffney’s list as a potential dividend initiator, though the tech giant doesn’t currently pay dividends. “Google is a name that we have identified similar to Meta, where they have tremendous free cash flow generation and cash on the balance sheet, as well as buying back shares – but they haven’t initiated a dividend,” he said. Nevertheless, even as tech companies drive the 2024 rally, investors ought to watch for names that could be primed to begin kicking off a dividend. “These are very dynamic and durable businesses that have significant staying power because of their scale, size and financial profile,” Gaffney said. “They have balance sheets that are very strong and dependable to withstand any economic cyclicality that we can run into.”
