Is Apple, Inc. Still a Good Dividend Stock at $600?

Many dividend investors have turned to Apple (NASDAQ: AAPL  ) in the past two years for income. After initiating a dividend in 2012, its meaningful yield combined with robust free cash flow made a recipe for a great long-term dividend stock. Even better, a good portion of the past two years Apple stock could have been purchased below $500; at those levels the stock was clearly an excellent dividend stock. But is Apple still a good dividend stock after its recent run-up?

For the most part, three criteria make or break a stock as a good pick for long-term income: staying power, profitability, and yield. Let's see how Apple measures up on each of these items.

An ecosystem built to last
A sustainable competitive advantage is arguably the most important factor an investor should look for in any investment -- dividend stock or not. These competitive advantages can come in several forms; some of the most common are cost advantages, intangible assets (like brands and patents), network effects, and switching costs.

What is Apple's competitive advantage? While the company certainly benefits from several different types of advantages, its best (and most undervalued) advantage is its ecosystem that seems to lock customers in once they buy an Apple product. You won't find this asset on the balance sheet, but don't be fooled -- it's there.

Apple's management team and other analysts and investors refer to Apple's effective ecosystem as a halo effect. It derives its power mainly from Apple's seamless integration of software, hardware, and services. For instance, an iPhone buyer gets access to the App Store, iTunes, and easy integration to other iOS and OS X devices.

iTunes Radio on iPhone 5c and MacBook Air. Image source: Apple.

This halo effect makes Apple's ecosystem "sticky," helping Apple achieve unorthodox customer retention rates across all of its hardware sales. Most importantly, this halo effect gives Apple the staying power needed to qualify the business as an excellent long-term investment.

A cash cow
So, Apple has staying power. But does it boast the profitability needed to be able to pay out a meaningful dividend? Absolutely. Apple's gross and net profit margins are 37.5% and 21.3%, respectively -- not bad at all. But the best perspective of exactly how much cash Apple is producing can be seen by looking at the company's free cash flow relative to sales; the company is ultimately converting about $0.25 of every dollar of sales into free cash flow. What is free cash flow? It's the good stuff management can use to build shareholder value -- the cash left over after operating expenses are taken care of. And most importantly for income investors, it's the cash that can be used to pay out dividends.

An OK yield poised for meaningful growth
After the recent run-up in Apple's stock price, its current dividend yield of 2.2% isn't very enticing. But where Apple lacks in yield today it makes up for in growth tomorrow.

Not only did the company announce in April that it plans to increase its dividend annually, but Apple's very low payout ratio also suggests there is plenty of room or further increases. A payout ratio is simply equal to the company's current dividend payout divided by earnings. The lower the ratio, the more sustainable the dividend if things turn sour, and the higher the probability of dividend increases in the future. Today, Apple is paying out only 29% of its earnings in dividends.

So, is Apple still a good dividend stock at $600? Yes. Sure, the yield isn't fantastic today. But income investors shouldn't rely completely on yield as a deciding factor for a dividend stock. Investors should also demand that the business is excellent and reasonably priced. Apple's sustainable and superior economics and likelihood of further increases in the dividend help qualify Apple stock as a good investment for income investors, even with a fairly small yield today.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On May 07, 2014, at 10:31 AM, larryw101 wrote:

    Another worthless article by a worthless Motley author.

    Motley Fool has gotten to be the most mocked financial site out there and it's because of these know- nothing authors they get paid pennies when readers to click on their stories.

  • Report this Comment On May 07, 2014, at 10:52 AM, TMFDanielSparks wrote:

    @larryw101,

    Any particular datapoint or argument that you disagree with?

  • Report this Comment On May 07, 2014, at 7:35 PM, Langstraat wrote:

    Did I image that when Apple announced that they were to return to paying a dividend that they said they would for three years? In which case it's not a long term investment eh?

    I hold long and have done since 1997

  • Report this Comment On May 09, 2014, at 8:59 PM, IlmNCPanther wrote:

    Dear god, could you have possibly drug that out any longer? Seriously, that video was AT LEAST 90% too long!!

  • Report this Comment On May 09, 2014, at 9:04 PM, IlmNCPanther wrote:

    That must be the worst video i have ever wasted my time on. Seriously, with all of the useless information you just told me about casinos, the location and history of the Motley Fool, the Dr. Phil. This is the longest amount of worthless babbling that i have ever heard from an adult!

  • Report this Comment On May 09, 2014, at 9:10 PM, IlmNCPanther wrote:

    I couldn't do it, i listened for 10 -15 minutes and got nothing useful. DON'T WASTE YOUR TIME!

  • Report this Comment On May 14, 2014, at 2:20 AM, sept2749 wrote:

    Good, right to the point article that follows title. I am a dividend growth, buy and hold investor in retirement and loved AAPL prior to their dividend. We now have both a growth stock and a good dividend growth stock, I figure to always keep some AAPL in my portfolio and am hoping with all the buybacks and split we'll get a nice high price.

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