An Apple Dividend Could Produce Big Returns for Apple Stockholders

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.

Microsoft is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft and buying calls on Intel. Apple is a Stock Advisor selections. Enterprise Products Partners and Kellogg are Income Investor recommendations. The Fool owns shares of and has written puts on Intel.

Neither James nor Mac owns any of the stocks discussed. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2010, at 4:13 PM, KSaranac wrote:

    Hi Mr. Motley. My investment in AAPL is, to me, significant. I understand the Co.'s cash to be about $45/ Sh. They can be assumed to be earning less than 1.5 pct. p. a. on that right now. Also, the well-run Company runs strongly cash-positive. I think they should reward their shareholders with a one-time dividend of about $25/ Sh. to be paid before dividend taxes go up, likely, next Jan. 1. Respectfully Augustus K.

  • Report this Comment On August 16, 2010, at 4:28 PM, djsantamonicacal wrote:

    Here's an article suggesting why Apple should NOT pay a dividend, by someone who knows a heck of a lot more about AAPL, Seeking Alpha's Andy Zaky.

    http://seekingalpha.com/instablog/205444-andy-zaky/87259-why...

  • Report this Comment On August 16, 2010, at 7:44 PM, Emperor2 wrote:

    I'm very happy how Steve Jobs has been running Apple. I have no complaints. It is interesting to read about people who tell other people what they should do with their money. Mr. Early calls Apple "arrogant". I think it very arrogant of Mr. Early to tell someone else what they should do with their hard earned money. Mr. Early sounds like he could work for the current administration. Our president has said he feels people should only earn a certain amount and the government should take the rest. I don't care what Apple does with that cash as long as they continue to come up with great products and make more money. They have made me a lot of money in their stock and I'm confident they will continue to make me money as their stock appreciates.

  • Report this Comment On August 16, 2010, at 9:42 PM, EquityBull wrote:

    Apple could do a one time dividend to keep investors on their feet and always ready for the next one. I don't think they need a regular dividend because that puts undue pressure on management to maybe lose some flexibility. However once the cash hoarde is this big you have plenty of cushion for a one time div.

    They could then wait a few years to do the next one or maybe sooner make a special one time dividend depending on their position at the time. Again this gives flexibility.

    I agree that apple should institute special dividend policy or regular dividend now. Too much cash doing nothing. Let the shareholders who own the company decide what to do with it. If they never offer a dividend from now until they eventually blowup from some disruptive force then all everyone ever did was trade paper and not money.

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