Better New Dividend Stock: Salesforce, Meta Platforms, Or Alphabet?
Several big tech companies have announced new dividends this year, with Salesforce (NYSE: CRM), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) all initiating their first dividends. While the payouts on these new dividends aren't drastic, they are the start of something much larger.
Which one of these is the new dividend payers is the best buy now?
The dividend yields aren't anything dramatic
Meta was the first of the trio to announce and pay its dividend. Investors first heard about Meta's dividend on Feb. 1 and received $0.50 per share on March 26. Salesforce was next, announcing its dividend on Feb. 28 with investors receiving a $0.40-per-share payout on April 11. Alphabet was last to the punch, with its $0.20-per-share dividend announced on April 25 and paid out on June 17.
While Meta pays out the highest amount per share, investors must use the dividend yield metric to understand how much they are receiving relative to the stock price.
| Company | Dividend Yield |
|---|---|
| Meta Platforms | 0.42% |
| Salesforce | 0.58% |
| Alphabet | 0.46% |
Data sources: Meta Platforms, Salesforce, and Alphabet.
From this analysis, Salesforce has the better dividend, as it pays out more per share. But that's where each company currently sits. What investors want to know is where their dividend payments could go.
To understand that, let's examine the percentage of cash flows being used to fund the dividend.
Only a small portion of cash flow is being devoted to paying the dividend
The dividend payout ratio can be used to understand what percentage of a company's cash flows is used to fund the dividend. This is a critical metric for dividend investors to understand, as it reveals if a company has room to increase its payout or if one is heavily burdened by its dividend.
Two things are often used to evaluate this: earnings and free cash flow. Each has its merits, so let's examine both.
From an earnings-per-share (EPS) perspective, the stocks' dividend payout ratios are as follows:
| Company | Dividend Payout Ratio |
|---|---|
| Meta Platforms | 11.2% |
| Salesforce | 37.7% |
| Alphabet | 12.2% |
Data source: YCharts.
This analysis shows that Meta and Alphabet hardly use any of their earnings to pay a dividend, while Salesforce is slightly more stretched. However, there is more to this metric than that. All three companies have had significant changes over the past year, so using a trailing-12-month EPS figure has its flaws. For example, of Salesforce's 12-month EPS total, 35% came from its latest quarter, showing that weaker results almost a year ago are skewing this metric.
This is why looking at the free-cash-flow (FCF) dividend payout ratio is a better choice, as free cash flow is a more consistent metric than EPS. By using FCF, we get a better idea of how much cash each company is truly paying investors.
| Company | Dividend Payout Ratio |
|---|---|
| Meta Platforms | 10.6% |
| Salesforce | 16.6% |
| Alphabet | 15.2% |
Data source: YCharts.
From an FCF perspective, all three companies aren't paying investors that much of a dividend. This means there is plenty of room for the dividend to grow over many years.
Additionally, investors shouldn't be rooting for any of these three to max out their dividend payout, as there are plenty of exciting investment opportunities in fields like artificial intelligence (AI), an area all three are actively pursuing.
But if I had to choose a single winner, I'd probably pick Meta Platforms since it has the largest room to grow. However, you can't go wrong with the other two stocks.
Should you invest $1,000 in Salesforce right now?
Before you buy stock in Salesforce, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Salesforce wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $703,539!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 28, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Salesforce. The Motley Fool has a disclosure policy.
