Looking to score some supersize dividends as the S&P 500 goes sideways? There's a billion lessons to be learned from investors turning dividends into serious cashflow.
Five investors, including Walton Enterprises, ETF giant Vanguard Group and tech tycoon Lawrence Ellison, each haul in $1 billion or more annually — yes, a billion — just from dividends as the top holders of S&P 500 stocks. They're a living testimony to how dividends can be part of a wealth-building strategy if you focus on the right spots. And they also highlight that even if you just own ETFs, and not individual dividend-paying stocks, you're part of the dividend gravy train.
"The current working view for S&P 500 dividends continues to be positive, with expectations of a record payment for 2023," said Howard Silverblatt of S&P Dow Jones Indices.
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S&P 500 Dividends Offer A Bonanza If You Go Big
Scoring a huge dividend isn't just about chasing a plump yield — just look at the Walton Family's family office: Walton Enterprises. You can learn an important lesson from the Walmart founding family if you're looking for big dividends.
The private investment firm hauls in $2.3 billion in annual dividends from its position in Walmart, which is the largest payout to any of the top holders of S&P 500 stocks. But the huge dividend to Walton Enterprise is not due to the stock's giant yield. Just the opposite. Walmart yields just 1.4%, which is identical to the yield on the S&P 500. The key is the size of the position. Walton Enterprise owns a giant position in the stock, making it the holder of 37% of the company.
The take-away isn't the financial value of being part of the Walton family (which would be nice). It's the importance of giving up on the blind race for stocks with the highest yields. Many high-yielding stocks in the S&P 500 end up being more trouble than they're worth. If dividends are your game, finding a solid position you can hold and build upon is how dividend wealth is made.
It's the same trick that works for Oracle founder Ellison. Oracle's shares' yield isn't all that impressive at 1.4%. But when you own a big position, Ellison owns 42% of Oracle, you're looking at a serious dividend check.
Keep this in mind when you have uninvested cash sitting in your brokerage account. Simply putting a large chuck of your portfolio in the S&P 500 allows you to build serious wealth from dividends. In fact, dividends alone accounted for 38.3% of the S&P 500's 10.3% annual total return since 1926, Silverblatt found.
You're Scoring From Dividends Even If You Don't Know It
Vanguard's rising influence in investing is putting lots of dividend cash into its investors' pockets. And it shows how simply owning ETFs gives you a piece of dividend payouts.
Half of the biggest annual dividend payouts from S&P 500 stocks go to Vanguard and its investors who have plowed trillions into the company's funds. Vanguard's position in Microsoft alone generates nearly $1.8 billion in annual dividends. That's remarkable as the software giant only yields 0.8%.
And again, Vanguard isn't chasing after just stocks with the highest yields. It's playing the long game building large positions in key S&P 500 stocks. It brings in $6.6 billion annually by just being heavily invested in five stocks in addition to Microsoft: Exxon Mobil, Apple, Johnson & Johnson and JPMorgan Chase.
And data show why this works. S&P 500 companies are now paying out more than $140 billion a quarter in dividends, Silverblatt says. Simply owning the market puts your hand in this lucrative pot.
And the pot keeps growing. Just this year, nearly 200 S&P 500 companies either started paying a dividend or increased it. And such new payouts are a big reason why S&P Dow Jones Indices thinks cash payments for 2023 will increase around 5%. Keep in mind that 80% of S&P 500 companies pay a dividend. That leaves 20% to start one. And also, it means there are many companies that can increase what they're paying to keep up with rising stock prices this year.
Big Yields Can Pay Off, Though
Most of the big dividend winners aren't chasing yields. The average yield on the 10 stocks that pay its top holding the most money is just 2.4% — which is higher than the S&P 500 — but not tremendously so.
But there is an important exception world pointing to: tobacco S&P 500 company Philip Morris International. Capital Research and Management, the investor better known for running the American Funds, takes in $1.4 billion a share from the tobacco firm. Capital Research is the No. 1 holder of Philip Morris stock at nearly 18% of shares outstanding. But the real reason for the giant payout on this stocks is the outsized 5.4% dividend yield.
Yet, isn't a cash of chasing a rising yield on a falling stock — a frequent recipe for disaster. Philip Morris is actually a stable free cash flow machine.
Philip Morris in just the past 12 months generated free cash flow of $7.4 billion. And it's not about to horde its cash, as do so many S&P 500 companies. The company's payout ratio in the past twelve months of 97.9%, meaning it pays out almost every dime of what it earns. That may not bode well for dividend growth, as it's already maxing out the dividend. But the company's revenue is remarkably stable, meaning the dividend looks solid. Philip Morris' revenue is 12% higher now than it was five years ago.
So don't feel bad if your last name isn't Walton or Ellison. If you want to grab your share of dividends, they're out there for the taking.
Investors Making $1 Billion Or More Annually From Dividends
Among the No. 1 holders of S&P 500 stocks
| Company | Ticker | Top holder | Annual div ($ billions) | Yield | Sector |
|---|---|---|---|---|---|
| Walmart | Walton Enterprises | $2.3 | 1.38% | Consumer Staples | |
| Microsoft | Vanguard Group | $1.8 | 0.82 | Information Technology | |
| Oracle | Lawrence J. Ellison | $1.7 | 1.40 | Information Technology | |
| Philip Morris International | Capital Research and Management | $1.4 | 5.43 | Consumer Staples | |
| Exxon Mobil | Vanguard Group | $1.4 | 3.12 | Energy | |
| Broadcom | Capital Research and Management | $1.3 | 2.16 | Information Technology | |
| Apple | Vanguard Group | $1.2 | 0.55 | Information Technology | |
| Morgan Stanley | Mitsubishi UFJ Financial | $1.2 | 3.85 | Financials | |
| Johnson & Johnson | Vanguard Group | $1.1 | 2.95 | Health Care | |
| JPMorgan Chase | Vanguard Group | $1.0 | 2.69 | Financials |
