There are two things a company can do that are guaranteed to make investors happy. One is to make a lot of money. The other is to give a nice chunk of that money back to shareholders in the form of dividends. When a company does both of those things, its stock is likely to be quite popular.
Apple claims the highest market cap of any company in the world. The technology giant generated free cash flow of $51.2 billion over the past 12 months. It's not surprising, therefore, that Apple sits on a cash stockpile (including cash, cash equivalents, and short-term marketable securities) of nearly $77 billion. The company also has long-term marketable securities worth almost $185 billion.
After going 17 years without paying a quarterly dividend, Apple resumed its dividend program in 2012 -- primarily because it had so much money it needed to do something constructive with it. Apple's dividend currently yields 1.62%. That's on the low end of where the company's yield has been in recent years, but for a good reason: Apple stock is up 35% so far in 2017.
Since resumption of the dividend program nearly six years ago, Apple's dividend has increased by 66%. Expect the dividend to keep on going up. Apple uses less than 27% of earnings to pay dividends.
But is Apple still a good stock to buy? Some would say it isn't, because of the maturity of the smartphone market and Apple's share price near all-time highs. My view, though, is that Apple will continue to put its enormous cash flow to good use, with the stock remaining a solid pick for long-term investors.
Microsoft's market cap of around $600 billion isn't quite as big as Apple's. Its free cash flow over the past 12 months of $31.4 billion also trails behind Apple. However, the huge software company has more cash on hand, with nearly $133 billion in cash, cash equivalents, and short-term investments.
Another area where Microsoft holds the advantage over its longtime foe is with its dividend. Microsoft's dividend yield currently stands at 2.16%. Over the past five years, the company has boosted its dividend by more than 80%. The prospects of more dividend increases down the road seem pretty good: Microsoft's payout ratio is around 56%.
Although Microsoft stock hasn't performed quite as well as Apple stock has so far in 2017, the software company's share price is still up an impressive 27%. And over the past five years, Microsoft's performance has trounced Apple's.
Microsoft continues to be a smart investing choice, in part because the company has successfully transformed itself into a software-as-a-service provider, which translates to dependable recurring revenue. Also, Microsoft has remained at the forefront of innovation in several key areas, including augmented reality and artificial intelligence.
Johnson & Johnson
Johnson & Johnson is the world's largest healthcare company, with a market cap of around $385 billion. The company generated free cash flow of $17.6 billion over the past 12 months. J&J's cash position of $13.5 billion might not look overly impressive, but the healthcare giant's recently completed $30 billion acquisition of Swiss drugmaker Actelion depleted its coffers somewhat.
Johnson & Johnson has long been a favorite for income investors. J&J's dividend currently yields 2.37%. The company is a member of the elite group of Dividend Aristocrats and has increased its dividend for 55 consecutive years. More dividend boosts are likely, with J&J using less than 55% of earnings to fund the dividend program.
Despite lackluster results in its first two quarters of this year, J&J stock performed well. And concerns about the company's growth appear to have been thrown to the side, after Johnson & Johnson reported solid revenue and earnings growth in the third quarter.
I like J&J's prospects over the long run. The company's biggest unit, its pharmaceutical segment, has a strong roster of pipeline candidates. Johnson & Johnson also continues to make acquisitions to fuel growth, including the purchase of Abbott Medical Optics to help its once-flailing medical devices business. Look for J&J, along with Apple and Microsoft, to continue minting money and returning much of it to shareholders in the form of dividends.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Keith Speights owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Johnson & Johnson. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.