One of the great strengths of dividend investing is its simplicity. Simply pick a basket of shares from the best dividend-paying companies in the world and let time do the rest.
However, successfully executing this strategy requires more than just finding and buying high-yielding stocks. Case in point: Semiconductor giant Qualcomm (NASDAQ:QCOM) currently yields an impressive 3.6% -- well above the S&P 500's 1.9% yield -- but tech giant Apple (NASDAQ:AAPL), with its 1.6% yield, is easily the better dividend stock to own today. Here are three reasons why.
1. Apple's cash hoard
Apple has a war chest of cash roughly the size of the Chilean economy -- $246 billion and growing. This massive cash pile lets the Mac maker continue to fund its massive capital-return program, while still leaving plenty of room to invest in strategic growth initiatives.
About $230 billion of Apple's cash and investments are held in overseas accounts so the company can avoid paying stringent repatriation taxes. Instead, Apple borrows against its cash hoard at low interest rates to fund the bulk of its capital return. This strategy could change in light of the corporate tax reform taking shape on Capitol Hill, but even if it doesn't, Apple could continue to grow its dividend payments using its current tactic for years into the future.
That may not be the case for Qualcomm. More on that in a moment.
2. Apple's continued earnings growth
Apple's current capital return potential alone makes it a better dividend stock. When considering the earnings bonanza Apple is likely to experience from the coming iPhone 8, the outlook for continued dividend growth only strengthens.
Numbers from research analysts at Bank of Montreal indicate that Apple's total iPhone installed base of 715 million consists of 487 million new iPhones and 228 million used ones. According to the bank's analysis, an impressive 31% of those new iPhones, around 151 million, will be two years old or more at Apple's typical iPhone launch date in mid-September. That calculation implies that Apple's installed iPhone base is primed for another sales "super cycle," in which a large number of iPhone owners upgrade to a new form factor. Apple hasn't meaningfully updated the phone's look since the iPhone 6 in 2014, and with rumors of a complete overhaul for the 10th-anniversary edition, it seems safe to expect a dramatic earnings surge for Apple, which will, in turn, provide Apple more dry powder that it can deploy in the form of even more dividends and stock buybacks.
3. Qualcomm's legal woes
Finally, while the future appears bright for Apple, the same can't be said for Qualcomm. After successfully (and expensively) navigating its legal headaches over patent payment collections in China, Qualcomm was recently hit by a wave of lawsuits that place further strain on the chipmaker's profit-center segment.
Late last year, the South Korean government fined Qualcomm $853 million on largely the same antitrust grounds the Chinese government used to penalize Qualcomm $975 million in early 2015. The U.S. Department of Justice filed a similar antitrust suit against the chipmaker in January. Then Apple sued Qualcomm for $1 billion on the same day the DOJ suit was made public. If all that weren't enough, the company also faces an ongoing probe from the EU that could result in additional fines.
Qualcomm has said it plans to defend itself in each case, but the sheer weight of this legal tsunami calls into question whether Qualcomm's patent licensing business will need to dramatically overhaul its financial structure. Having to do so would be most damaging to Qualcomm, which receives roughly two-thirds of its pre-tax profits from its patent licensing segment.
Of course, it's difficult to predict the outcome of its legal battles, but the risk that its business model could fundamentally change is yet one more reason Apple remains a better dividend stock than Qualcomm.