Looking to get huge dividends while the S&P 500 index goes sideways? There are a billion lessons to be learned from investors who turn dividends into serious cash flow.
Five investors, including Walton Enterprises, ETF giant Vanguard Group and tech mogul Lawrence Ellison, each earn $1 billion or more each year — yes, a billion — from dividends alone as the largest holders of S&P 500 stocks. I am a living testimony to how dividends can be part of a wealth creation strategy if you focus on the right points. And they also point out that even if you only own ETFs and not individual dividend-paying stocks, you are part of the dividend train.
“The current operating outlook for S&P 500 dividends continues to be positive, with expectations of a record payout for 2023,” said Howard Silverblatt of S&P Dow Jones Indices.
S&P 500 dividends offer a bonanza if you go big
Getting a huge dividend isn’t just about chasing a consistent yield – just look at the Walton family family office: Walton Enterprises. You can learn an important lesson from Walmart’s founding family if you’re looking for big dividends.
The private investment firm earns $2.3 billion in annual dividends from its position in Walmart, representing the largest payout for a major holder of S&P 500 stocks. But Walton Enterprise’s huge dividend isn’t due to gigantic return on the stock. Just the opposite. Walmart yields just 1.4%, which is identical to the return of the S&P 500. The key is position size. Walton Enterprise has a gigantic position in the stock, making it a 37% owner of the company.
The bottom line is not the financial value of being part of the Walton family (which would be nice). It’s the importance of giving up the blind rush for the highest yielding stocks. Many high-yield stocks in the S&P 500 end up being more trouble than they’re worth. If dividends are your goal, finding a solid position to hold and build on is how dividend wealth is created.
It’s the same trick that works for Oracle founder Ellison. Oracle’s stock yield isn’t all that impressive at 1.4%. But when you own a large position—Ellison owns 42% of Oracle—you’re looking at serious dividend control.
Keep this in mind when you have uninvested money in your brokerage account. Simply by placing a large portion of your portfolio in the S&P 500 you can create significant wealth from dividends. In fact, dividends alone account for 38.3% of the S&P 500’s 10.3% annual total return since 1926, Silverblatt found.
You are scoring with dividends even if you don’t know it
Vanguard’s growing influence in investing is putting large amounts of cash dividends in the pockets of its investors. And it shows how simply owning ETFs gives you a share of the dividend payments.
Half of the largest annual dividends paid by S&P 500 stocks go to Vanguard and its investors who have invested trillions in the company’s funds. Vanguard’s position in Microsoft alone generates nearly $1.8 billion in annual dividends. This is notable given that the software giant yields just 0.8%.
And once again, Vanguard doesn’t just chase the highest-yielding stocks. He’s playing the long game by building large positions in major S&P 500 stocks. He makes $6.6 billion a year simply by investing heavily in five stocks besides Microsoft: Exxon Mobile (XOM), Apple (AAPL), Johnson & Johnson (JNJ) and JP Morgan Chase (JPM).
And the data shows why it works. Companies in the S&P 500 Index are currently paying more than $140 billion in dividends, Silverblatt says. Simply owning the market puts your hand in this lucrative pot.
And the plate continues to grow. Just this year, nearly 200 companies in the S&P 500 index started paying a dividend or increased it. And these new payments are a key reason why S&P Dow Jones Indices believes 2023 cash payments will increase by about 5%. Keep in mind that 80% of S&P 500 companies pay a dividend. That leaves 20% to start one. Plus, it means there are plenty of companies that can increase what they pay to keep up with rising stock prices this year.
However, large returns can pay off
Most big dividend winners don’t chase yield. The average return of the 10 highest paying stocks is just 2.4% – higher than the S&P 500 – but not exceptionally so.
But there’s one important exception the world is pointing to: the S&P 500 tobacco company Philip Morris International (PM). Capital Research and Management, the investor best known for managing American funds, gets $1.4 billion per share from the tobacco company. Capital Research is the largest holder of Philip Morris shares with nearly 18% of shares outstanding. But the real reason for these stocks’ gigantic payout is the huge 5.4% dividend yield.
However, chasing a rising yield on a falling stock is not about the money – a frequent recipe for disaster. Philip Morris is actually a stable free cash flow machine.
Philip Morris generated free cash flow of $7.4 billion in the last 12 months alone. And it has no intention of hoarding cash, as so many S&P 500 companies do. The company’s payout ratio over the past twelve months was 97.9%, meaning it pays out nearly every cent of what it earns. This may not bode well for dividend growth, as it is already maximizing the dividend. But the company’s revenues are remarkably stable, meaning the dividend looks solid. Philip Morris’ revenue is 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 take your share of dividends, they are there for the taking.
Investors earning $1 billion or more per year from dividends
Among the top holders of S&P 500 stocks
|Agency||Ticker||Superior support||Annual Div ($ billion)||Product||Sector|
|Walmart||(WMT)||Walton Enterprises||$2.3||1.38%||Basic necessities|
|Microsoft||(MSFT)||Avant-garde group||$1.8||0.82||Information Technology|
|Oracle||(ORCL)||Lawrence J. Ellison||$1.7||1.40||Information Technology|
|Philip Morris International||(PM)||Capital research and management||$1.4||5.43||Basic necessities|
|Exxon Mobile||(XOM)||Avant-garde group||$1.4||3.12||Power|
|Broadcom||(AVGO)||Capital research and management||$1.3||2.16||Information Technology|
|Apple||(AAPL)||Avant-garde group||$1.2||0.55||Information Technology|
|Morgan Stanley||(SM)||Mitsubishi UFJ Financial||$1.2||3.85||Financial|
|Johnson & Johnson||(JNJ)||Avant-garde group||$1.1||2.95||Health care|
|JP Morgan Chase||(JPM)||Avant-garde group||$1.0||2.69||Financial|
Source: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter (X) @mattkrantz
YOU MIGHT ALSO LIKE:
Two of the richest men in the world uploaded the exact same stocks
8 shares turn $10,000 into $120,005 in 8 months
Learn how to time the market with IBD’s ETF market strategy
Find today’s top growth stocks to watch with IBD 50
Join IBD Live every morning to get stock tips before the open