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Apple (Nasdaq: AAPL ) is sitting on a huge pile of cash. Is it time to pay a dividend? I recently asked Motley Fool Income Investor advisor James Early about Apple and got his take on some dividend stocks on his radar.
Mac Greer: James, you're The Motley Fool's resident dividend guy. Apple was sitting on around $46 billion in cash and investments, as of the end of last quarter. Should Apple start paying a dividend?
James Early: Absolutely. It's selfish and a bit arrogant for big tech companies to hold so much cash, as Microsoft (NYSE: MSFT ) did for a while and continues to do -- with $37 billion in cash and short-term investments on the balance sheet now -- even after starting modest dividend payments after paying a special dividend in 2004. Tech companies fear that paying big dividends will make them look stodgy and short on growth opportunities, but those big cash balances sitting in their bank accounts year after year do the same thing.
Greer: But James, dividends excite you the same way that Justin Bieber excites teenage girls. (OK, maybe not the same way). But as you mentioned, for a lot of investors, a stock that pays dividends is a stock that's lost its sex appeal. It's a stock with its go-go days behind it. So how does Apple pay a dividend while still maintaining its image as a cutting-edge company with a stock that could be headed for the moon?
Early: I've never fainted at the sight of a dividend, but I've gotten giddy on occasion. Apple might want to read a study by Rob Arnott (of the CFA Institute) and Cliff Asness (of hedge fund AQR Capital Management) called "Surprise! Higher Dividends = Higher Earnings Growth." They divided stocks into deciles and found that the highest-yielding 10% had the highest earnings growth over the next 10 years. In other words, corporate waste is rampant, and a divided policy paradoxically encourages companies to focus only on the most profitable opportunities. This leads to less waste and ultimately, higher earnings.
Greer: OK, I'm adding that article to my bedtime reading. It should help with my insomnia. What do you think some other misconceptions are about dividend stocks?
Early: Actually, if we could clear up the impression that they're all slow and stodgy, it would help with my insomnia. But asset-allocation-wise, investors need a base of steady stocks, to which spicier fare may be later added. In other words, dividend stocks should be your equity anchor, or the base of your stock food pyramid, if you prefer that analogy. Because you get a portion of your return in cash -- to spend or to reinvest -- your risk is lower with dividend-paying companies.
Greer: Didn't the food pyramid go the way of the metric system? You remember when the U.S. was going to move to the metric system? But I digress. What are three or four dividend stocks that I should consider as anchors for my portfolio?
Early: I remember having the metric system shoved down my throat in grade school, but without acknowledgment that it was a completely different system than everyone used at home. I think that's why it didn't catch on. Anyway, one recommendation from my Income Investor newsletter is Enterprise Products Partners (NYSE: EPD ) , which is actually a partnership that owns thousands of kilometers of fuel pipelines around the U.S. It yields 6.2%. For something more familiar, Kellogg (NYSE: K ) is a great way to play inexpensive branded products -- one of my favorite niches, as cheap branded products hold up better than costly ones in a recession. One outside my service that I've watched is Intel (Nasdaq: INTC ) , a one-time sexy tech company that now pays a 3.3% yield -- and is still alive and kicking to show for it.
Greer: My favorite all-time cereals as a kid, in no particular order: Golden Grahams. Count Chocula. Apple Jacks. Captain Crunch. And Frosted Mini Wheats. You?
Early: And you still have teeth? That's great. Actually, when I was around nine, I would have all but married a box of Froot Loops, but only because I don't think I knew what marriage entailed back then. These days, as listeners of Motley Fool Money well know, I've morphed into a health nut. So I skip the cereal aisle. With some cereals costing $8 or more a box, I'm saving money. But given those prices and the current American diet, it's a good business to invest in.
Want more? James thinks one oil stock could produce gushing returns.