Meta (NASDAQ: META) announced last year it would begin paying out dividends. Although most people consider it a growth stock, it’s been paying out quarterly income since then, providing passive income to investors. If an investor put £2k in Meta shares, could they use it to generate cash, or would they be missing the bigger picture?
Dividend details
Firstly, there’s no catch. Meta really does pay out a dividend. It was initiated at $0.50 per share and was hiked back in March to $0.525 per share. This represents a 5% increase in the payout.
However, it’s worth looking at the dividend yield. This compares the amount paid per share to the current share price. For Meta, the dividend yield’s an underwhelming 0.3%. This means that the £2k investment would pay just £6 a year. Granted, the forecast is for the payout to increase further in the coming years. Yet this doesn’t mean the yield will necessarily grow.
Part of the yield calculation involves the share price. Over the past year, the stock’s up 35%. If it continues to move higher, then the yield could fall. Of course, an investor would still profit from the capital appreciation. However, purely from an income perspective, it’s unlikely to excite many people.
Getting a perspective
In the stock market, it’s rare to find a company that can offer both growth and generous income. For Meta, it firmly falls in the growth category. Based on the current outlook, I believe it has the potential to do well. It’s rapidly deploying artificial intelligence (AI)-powered features across its platforms, and building up a superintelligence unit to push this area further.
It has a high-margin ad business and a more disciplined approach to costs over the past couple of years, resulting in extreme profitability. Therefore, the share price could keep moving higher.
Of course, substantial profits mean that the dividend could be increased. But in reality, I expect most of the money to be retained in the business to help fuel new initiatives. It doesn’t really make much sense to increase the dividend massively.
One concern some have is that the huge AI infrastructure spending needs to start yielding more results to justify the outlay. If the initiatives underdeliver, the sunk costs could be a sore point for investors.
Understanding the type of stock
I believe that Meta isn’t a stock to consider buying purely for passive income. In fact, if I were looking for an income share, there are many better options available to me. Yet it’s a nice added perk of investing in the business, especially one with a strong growth outlook.
On that basis, I think investors could consider buying the stock for capital appreciation, with the dividends being a small cherry on the big cake.
