Has Apple Become the Perfect Dividend Stock?

When Apple  (NASDAQ: AAPL  ) announced its intent to start paying dividends, the yield looked stingy at just 1.8%. The stock climbed another 18% over the summer, easily crushing the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and reducing the already soft dividend to an even thinner 1.5% annual payout.

But then the tide turned against Cupertino. Share prices plunged 31% in four months, leaving opportunistic income investors with a far stronger dividend proposition. If you bought Apple shares yesterday, you locked in a 2.2% yield -- all without Apple lifting a finger to boost or accelerate its payout schedule, fiscal-cliff worries and bulging coffers notwithstanding.

Even so, Apple still lags far behind chip supplier Intel  (NASDAQ: INTC  ) and its 4.1% dividend yield. Microsoft  (NASDAQ: MSFT  ) crossed the ford into value-investing land a decade ago and yields a respectable 3.4% today. So Cupertino hasn't exactly become the ideal income stock quite yet.

Apple did jump above IBM 's (NYSE: IBM  ) 1.8% yield, even though Big Blue strives to keep its direct shareholder returns as juicy as possible. All three of these Dow-bound tech stocks come with impeccable dividend-boosting pedigrees:

INTC Dividend Chart

INTC Dividend data by YCharts.

Does this make Apple a better dividend investment than IBM? I don't think so.

Apple's cash reserves may be without equal outside the world of big banks, and its current cash-generation powers are also unparalleled. But Apple has chosen to keep the vast majority of these riches close to the vest. The company is scheduled to return about $10 billion to shareholders over the next year, not counting Apple's habit of printing $700 million of new shares every year without ever buying any of them back. That's out of free cash flow of $43 billion.

By contrast, Big Blue spent a sum of $14.7 billion on buybacks and dividends over the last 12 months out of $16 billion in free cash flow. That's a 92% direct cash return to shareholders.

If Apple adopted buyback and dividend plans of IBM's caliber, Cupertino would yield a direct shareholder return of 8.3%. It would be the fourth-richest yield in the S&P 500.

There's ample opportunity for Apple to boost its payouts, especially since the company can fall back on more than $120 billion in cash reserves.

Should you buy Apple?
There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been rewarded with gains of more than 1,000%. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief is prepared to fill you in on reasons both to buy and to sell Apple, as well as what opportunities remain for the company (and your portfolio) going forward. To get instant access to his latest thoughts on Apple, simply click here now.


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