Is Apple, Inc.'s Dividend Still Valuable?

Apple stock seems dead set on its upward climb. While this is great for current shareholders, does a pricier Apple mean income investors have missed their shot at cashing in on Apple's cash flow?

May 27, 2014 at 11:45PM

Apple (NASDAQ:AAPL) stock seems dead set on its upward climb. Since the tech giant reported better than expected second-quarter results last month, the stock has gained about 20%. In that same period, the S&P 500 has gained less than 3%. Does this change the game for Apple investors, particularly those looking for income from the stock?

The rare, awesome opportunity
With Apple's 2012 announcement that it would begin paying investors a dividend, the stock has found its way to many income investors' portfolios and watchlists. And subsequent dividend increases have made the company's dividend even more valuable.

Apple Store China

But the stock isn't trading at the same wildly conservative valuation it was for the majority of the last year and a half. In May of 2013, for example, when Apple was trading at about $450 and offered a dividend yield was 2.5%, I called the opportunity a "dividend investor's dream stock." The combination of an undervalued stock, big prospects for dividend increases, and a meaningful dividend yield offered income investors a rare low-risk, big future cash yield opportunity.

But with the newly inflated price for Apple stock, is there still potential for meaningful cash return? To answer that, let's examine Apple's dividend today.

Still a good opportunity?
With shares now trading around $625, Apple certainly doesn't offer income investors the same lucrative outlook it did in the past. But that doesn't mean the opportunity for dividend investors in Apple stock today isn't, at least, solid.

Looking at Apple's dividend yield alone, it's boring enough to keep many income investors away. At today's price, Apple's $13.16 in annual dividends gives investors a dividend yield of 2.1% -- 400 basis points lower than the yield available to investors in May 2013.

But a closer look reveals a better story. One sentence in Apple's press release last month changes the game: "The company also plans to increase its dividend on an annual basis." By how much could Apple increase its dividend each year? This year, Apple boosted its payout by 8%. And there's no reason to believe this rate of growth isn't sustainable for the next five years or more. Why? Apple is currently paying out just 29% of its annualized earnings in dividends; this leaves a lot of room for more eight percent increases.

Ipad Air

iPad Air. Despite recent slow growth in Apple's iPad business, a closer look reveals Apple's second-largest business segment has plenty of opportunity for further growth. Image source: Apple.

Sure, a 2.1% yield combined with an 8% annual increase doesn't scream buy to dividend investors looking for solid streams of income. But any seasoned income investor knows that a good dividend stock must have more than a stream of income. It should also be a good business, and preferably an undervalued one. In this regard, Apple is a star player. Not only is Apple a leading brand in consumer electronics in terms of both revenue and profits, but the stock trades at just 15 times earnings -- a reasonable price for any market leader. Even more, an iPhone 6, a healthy iPad business, and rumored iWatch could mean there's still big upside left to Apple's current levels of cash flow.

So, maybe Apple's not a buy simply for its dividend. But when income investors also take a look at Apple's underlying business and the company's prospects, the stock is still a good dividend stock -- even at $625.

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Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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