Key Points
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These tech businesses generate significantly more net income than the dividends they pay to shareholders.
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Strictly for yield, investors will find superior options out there, notably from mature consumer stocks.
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All the AI-related spending increases uncertainty, but that may now be reflected in the two stocks’ valuations.
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Both Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META) instituted a notable change to their capital allocation policies in 2024. The social media giant moved first. In February of that year, it introduced a $0.50 quarterly dividend. The Google parent followed suit, announcing a quarterly payout of $0.20 in April 2024.
These companies have been wonderful to their shareholders over the years. Both have outperformed the S&P 500 index in the past decade. Capital appreciation was the main driver of returns in investment portfolios.
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But now that dividends are a mainstay, do either of these “Magnificent Seven” stocks make sense for investors seeking income-generating opportunities?
Capital allocation has evolved
These companies have raised their dividends in the past couple of years. Alphabet currently pays $0.22 per share, up 10% from the initial distribution. Meta Platforms’ dividend is up 5% from the beginning to $0.525 today. While the growth is certainly small, these leadership teams are at least hinting to shareholders that slowly increasing the payouts might be a permanent feature.
There is minimal risk that these dividends come under any pressure. Both businesses have historically operated from a position of financial robustness. In the past five years, Alphabet’s quarterly operating margin averaged a fantastic 30.4%. At 36.4%, Meta Platforms’ average margin is even better. And combined, they have $67.5 billion in cash and cash equivalents on their balance sheets.
Dividends are well covered by their earnings streams. Through the first nine months of 2026, Alphabet’s net income was almost 25 times higher than its dividends, while Meta Platforms’ bottom line was nearly 13 times greater than what it paid in distributions to shareholders. From this vantage point, it looks like the payouts are safe.
However, investors shouldn’t rush to buy these businesses if all they’re after is a meaningful income stream. The dividend yields are tiny. Alphabet, at a dividend yield of 0.31%, and Meta Platforms, at 0.33%, aren’t attracting any attention in this regard. These figures are significantly lower than the inflation rate.
There are superior choices out there. The Vanguard S&P 500 ETF, for example, offers a much better dividend yield of 1.07%. More stable consumer stocks, like Coca-Cola, Procter & Gamble, and Altria Group, pay investors sizable amounts. And it’s hard to ignore the 10-year Treasury, which currently yields 5%.
There’s only one reason to own these tech stocks
Given how small their dividend yields are, Alphabet and Meta Platforms don’t exactly cater to income seekers. On the other hand, they still target investors who want to add growth opportunities to their portfolios. These businesses offer the potential for market-beating returns over the next five or 10 years.
Their scale is not an inhibitor. Alphabet posted 25% year-over-year revenue growth in Q3, similar to Meta Platforms’ 26% gain. This points to long expansionary runways ahead. These companies are direct beneficiaries of the internet’s proliferation.
These management teams have been directing their time and resources to artificial intelligence (AI), which is sucking up capital that might otherwise have gone to raising dividend payouts. Both Alphabet and Meta Platforms will invest hundreds of billions of dollars this year in technical infrastructure to expand compute capacity and support their AI initiatives.
And they’re raising external funding to power these ambitions, in turn pausing share buybacks, which historically played a key role in returning capital to investors. Free cash flow has also turned negative. This development will test the market’s patience because nobody knows the kinds of returns these substantial AI-related investments will bring. It’s impossible to predict when the data center spending boom will peak or who will capture the excess profits.
On an earnings basis, however, these two leading technology stocks trade at very compelling valuations. Market sentiment reflects elevated levels of uncertainty.
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
