Nvidia's stock price is expected to rise significantly with an increase in dividends.

Over the past year, tech giants have dominated the price-to-earnings ratio. While this is great, substantial profits always lead to investor concerns about whether it can be sustained. Revenue and earnings growth might already be factored into current valuations, but dividend growth may not be. And, dividend increases may maintain investor satisfaction for years to come.

However, the stock prices of this group are very high at 32 times the expected earnings for 2024, 45% higher than the market average of 22 times.

Of course, there are good reasons for this. Wall Street predicts that the profits of these stocks will grow by an average of about 25% over the next few years, which is approximately double the growth rate of the S&P 500 index as a whole. As growth accelerates, valuation multiples should increase, leading to above-average dividend growth as well.

Just the increase in dividends alone is sufficient to justify the stock price increase for patient investors. Take Microsoft as an example. If the company grows over the next 10 years and pays out cash flow like a typical company, shareholders could receive about $4 per quarter from the current 75 cents. This represents an average growth rate of 18%. The $16 annual dividend, assuming a constant market dividend yield, would imply a stock price of around 1,100 dollars. The current stock price is about 430 dollars.

Many things will change over the next 10 years, but it demonstrates the power of dividend increases. Similar calculations apply to four of the six stocks. Amazon does not pay dividends, but it should. Nvidia only pays a small amount of dividends.

The darling of artificial intelligence recently raised its dividends by 150%. While this is great, the increase was solely to make the quarterly dividends 1 cent after a 10-for-1 stock split. Nvidia's current dividend yield is around 0.04%, the lowest among dividend-paying stocks in the S&P 500 index. For now, Nvidia's stock will continue to be heavily influenced by the growth of AI computing rather than dividend increases.

Amazon should not be like that. The time has come for the e-commerce and cloud giant to start paying significant quarterly dividends, as Meta and Alphabet did this year. For Amazon, such a yield would be 20 or 25 cents per quarter, consuming about 14% of the estimated free cash flow for 2024. This is a safe dividend payout ratio. S&P500 dividend-paying companies spent about 43% of free cash flow on dividends in the past year.

This could also be a catalyst for stock price increases.

Indeed, dividends may not always start that way, as pointed out by Chris Seneck, a strategist at Wolff Research.

"Ultimately, the outcome depends on whether the market sees this announcement as a positive change in capital allocation or as a signal of the end of long-term growth," the same individual wrote in a recent report.