For investors who purchased shares of Apple (NASDAQ:AAPL) back in 2012, the company's dividend was probably an afterthought. After all, the company was growing earnings like gangbusters, and it had only just announced its payout -- at the time, a moderate yield of 2%.

But for those who took the dive back then -- and have held since -- there's a bonus that's accompanied price appreciation: a hefty dividend. In fact, today's yield currently hovers around 3.4% based on the original purchase price.

A miniature man walking up steps made of coins

Image source: Getty Images.

How can you spot such sweet deals? There are three questions you need to answer. Find the answers you're looking for and you've got a compounding machine in your portfolio.

1. Is there a history of dividend growth?

This is probably the most important trait to look for: a history of dividend growth.

Dividend Aristocrats are a great place to start your search. To make this rarified group, a business needs to have raised its dividend at least once per year for 25 consecutive years -- without ever missing a payment. There are 50 such companies right now.

Your search certainly doesn't have to end there: Simply take any dividend stock you are interested in, head over to, and check out the growth rate over the past five years.

2. What could the future payout look today's prices?

One of my favorite things about that dividend website is that it tries to give you an idea of what the dividend yield could be in 10 years, based on today's prices and current dividend growth rates.

That's admittedly an inexact science -- as there's no way to know if a company can keep increasing its dividend at a steady rate. That being said, I think it's instructive to help you maintain a long-term focus.

Take VF Corp. (NYSE:VFC) -- parent company of clothing brands like The North Face and Timberland, and a Dividend Aristocrat -- as an example. Right now, the company has a yield of 2.7%. But the payout has grown by over 15% per year since 2012. Even if we tamp down expectations to 14% growth over the next decade, the yield on your original purchase -- in 2027 -- will be a whopping 10%.

A stat like that will make you look at middling dividends in a whole new light.

3. What's the payout ratio from free cash flow?

Sustainability of dividend growth is another factor to consider. That's why it's vital to check out how much free cash flow the dividend eats up every year.

You can do this by using a site like Yahoo! Finance (a Verizon subsidiary). When you look at a company's cash flow statement, simply take the cash generated from operations and subtract out capital expenditures; this is your free cash flow. Then divide the amount spent on dividends by free cash flow.

Here's how our two exemplars would look over the past twelve months:




Cash from operations

$64.1 billion

$1.46 billion

Capital expenditures

$12.6 billion

$0.17 billion

Free cash flow (FCF)

$51.5 billion

$1.29 billion

Dividend payments

$12.6 billion

$0.66 billion

FCF payout ratio (dividends / FCF)



Data source: Yahoo! Finance. Free cash flow = cash from operations minus capital expenditures.

Generally speaking, dividend investors like to see the payout ratio near or below 85% to know that there's a margin of safety. That margin should allow a company to keep paying a dividend in difficult economic times, and provide slight increases during good times.

The fact that both of these companies are so far below that threshold is evidence that there's lots of room for growth -- especially in Apple's case.

Don't stop here

Beyond just Apple and VFC, there are other well-known dividend stocks that share these traits. As I said, Dividend Aristocrats are a good place to start your hunt. But by no means is this an exhaustive list.

Just remember to take the long view (how big could this dividend be in a decade?); look for dividend growth; and kick the tires on the payout ratio to see how sustainable the trends are.

Brian Stoffel owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Verizon Communications. The Motley Fool has a disclosure policy.