A group of technology giants dubbed the “Magnificent Seven” was responsible for a large proportion of the 26.3% gain in the S&P 500 last year. Their collective valuation of $12 trillion makes up 28% of the index, giving them a significant influence over the broader market.
Performance of the Magnificent Seven in 2023
The Equal Weight S&P 500 index finished 2023 with a gain of just 11.5%, underscoring the substantial impact of the surging Magnificent Seven returns on the actual S&P 500. If you didn’t own that group of stocks last year, your portfolio probably lagged the market.
But it’s not all about blockbuster gains, because some of the Magnificent Seven stocks also pay dividends. I’m going to show you how much you could earn with a $350,000 investment split equally across the seven stocks.
Diverse Presence in the Technology Sector
The Magnificent Seven companies operate across every major segment of the technology sector. Artificial intelligence (AI) was the largest driver of value in 2023, with Nvidia leading the group higher. AI, cloud computing, and electric vehicles are key areas of focus for these tech giants.
Amazon, Microsoft, and Alphabet are some of the world’s largest data center operators, and therefore some of Nvidia’s biggest customers. They use those centralized data centers to deliver cloud services and the computing power necessary to develop AI to millions of businesses around the world.
Meta Platforms is using AI to enhance user experience, showing more relevant content to its 3.1 billion monthly users. Apple created its own AI chatbot and LLM in-house, while Tesla’s future is intertwined with the success of its AI-powered autonomous self-driving vehicle technology.
Dividend Paying Stocks in the Magnificent Seven
Some companies generate so much profit they can’t possibly reinvest it all into their operations to fuel more growth, so they pay some of it to shareholders instead. Dividends are the most common form of distribution, and they usually come as quarterly cash payments.
Apple, Microsoft, and Nvidia are the only three Magnificent Seven stocks that pay dividends. Each of them less than a 1% yield, which are the payouts investors can expect to receive annually, calculated based on the value of their holdings.
The Impact of Dividends and Buybacks on Investment Yields
Investors often overlook the impact of dividends and buybacks on their overall investment yield, but it’s a critical consideration. The yields on specific stocks can either frustrate or bolster portfolio returns, and thus these figures are not to be taken lightly. Among the Magnificent Seven, all pay dividends, with Microsoft offering the highest yield. However, this yield could decrease drastically should the company fail to raise it in due course.
Investment Strategy and Yield
For instance, in the scenario of a $350,000 investment split equally between the Magnificent Seven, the effective yield can be a mere 0.18% annually. This is a paltry amount compared to the return on cash in a savings account, but it does serve as an additive to the capital growth provided by these stocks.
Rethinking Returns: Dividends and Stock Buybacks
Moreover, dividends are not the only form of distribution; companies can also conduct stock buyback programs, which reduce available shares in the market and consequently increase the share price. Five of the Magnificent Seven companies have active share repurchase programs, an endeavor worth a combined $186.6 billion over the last year. This route gives companies more discretion over when to distribute funds, unlike dividends, where they must commit to a fixed payout.
The Future of the Magnificent Seven
Investors that overlooked the Magnificent Seven in 2023 may have underperformed the S&P 500 index. While the potential for continued exponential growth from these giants may seem far-fetched due to their size, it’s worth noting that they stand at the vanguard of rapidly expanding industries. They are well-positioned for substantial revenue gains and will likely utilize their substantial financial resources to capitalize on this opportunity.
Given the forecast projecting a significant impact on the global economy due to AI, it’s evident that the Magnificent Seven already have a stronghold in this sector. Thus, they remain a robust investment choice, with any dividends earned acting as an added bonus.
Conclusion: A Cautionary Tale
That said, it’s imperative for investors to diversify their portfolios and carefully weigh the impact of company policies on their returns. Thus, an analysis that accounts for both dividends and stock buybacks is vital in determining the overall yield on investments.
