NVIDIA's stock price will rise drastically due to an increase in dividends

Over the past year, stocks of major technology companies have dominated price-earnings ratios. This is great, but big profits always lead to investor anxiety about whether they can continue. Sales and earnings growth may already be factored into current assessments, but dividend growth may not be the case. Also, increased dividends can keep investors satisfied for years to come.

However, the group's stock price is extremely high, 32 times the expected profit for 2024, and is at a level of 45 percent higher than 22 times the market average.

Of course, there are good reasons for this. Wall Street predicts that profits from these stocks will grow by an average of about 25% over the next few years, which is about twice the growth rate of the S&P 500 index as a whole. The faster the growth, the higher the evaluation ratio, which should also lead to dividend growth above average.

The increase in dividends alone is enough to justify a rise in stock prices for patient investors. Take Microsoft as an example. The company will grow in 10 years, and if cash flow is paid like a typical enterprise, shareholders can receive around $4 from 75 cents per quarter now. This is an average growth rate of 18%. An annual dividend of $16 means that the stock price will be approximately $1,100, assuming that the current market dividend yield is constant. The current stock price is around $430.

Many things will change over the next 10 years, which shows the power of increasing dividends. The same calculation applies to 4 out of 6 stocks. Amazon isn't paying dividends, but they should. NVIDIA only pays a small amount of dividends.

The company, which is the darling of artificial intelligence, recently raised its dividend by 150%. This is great, but the increase was only to ensure that the quarterly dividend was 1 cent after the 10-1 stock split. The current dividend yield of NVIDIA shares is approximately 0.04%, which is the lowest among dividend stocks constituting the S&P 500 Index. As of now, NVIDIA shares will continue to be greatly influenced by the growth of AI computing rather than an increase in dividends.

Amazon shouldn't be like that. The time has come to begin paying substantial quarterly dividends, as Meta and Alphabet did this year. For this e-commerce and cloud giant, such a yield would be a quarterly dividend of 20 cents or 25 cents, and would consume approximately 14% of expected free cash flow in 2024. This is a safe payout rate. S&P 500 dividend payers spent approximately 43% of their free cash flow on dividends over the past year.

This could also be an opportunity for stock prices to rise.

Certainly, Wolff Research strategist Chris Señek points out that dividend starts not necessarily like that.

“The outcome ultimately depends on whether the market sees this announcement as an upturn in capital allocation or a signal of the end of long-term growth,” he wrote in a recent report.