Please ensure Javascript is enabled for purposes of website accessibility

Why Apple Is a Great Dividend Growth Stock

By Ashraf Eassa - May 23, 2018 at 7:09AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple checks all the boxes for a dividend growth investment.

You probably already know that getting paid to own a stock (i.e. receiving a dividend) is pretty great. You know what's even better? Having that payment grow over time.

Here's where a popular method of investing commonly known as dividend growth investing comes in. In a nutshell, a dividend growth investor looks to invest in stocks that pay significant dividends and can both sustain those dividends and grow them for the foreseeable future.

One stock that every dividend growth investor should consider for his or her portfolio is Apple (AAPL 1.62%), as it ticks all the right boxes.

A silver iPhone 8 Plus on the left and rose gold iPhone 8 on the right.

Image source: Apple.

Apple's dividend is large and sustainable

As of this writing, the company behind the iPhone pays a dividend of $0.73 per share each quarter, or $2.92 annually, which works out to a yield of around 1.56%. This isn't the highest you'll find among potential dividend growth stock candidates, nor is it even close to the highest-yielding tech stock out there, but it's a respectable payout roughly in line with the S&P 500.

Perhaps more importantly, though, Apple's dividend is sustainable. Generally speaking, dividend payments come out of a company's free cash flow. So, to try to understand how sustainable a dividend is, we need to look at how much cash the company generates and compare that to the amount it pays out in dividends.

The percentage off free cash flow used to cover the company's dividend expense is known as the cash dividend payout ratio. The smaller the percentage, the more sustainable the dividend is (since it's more likely to be maintained even during a significant business downturn).

AAPL Free Cash Flow Per Share (TTM) Chart

AAPL free cash flow per share (TTM). Data by YCharts.

Apple's current dividend payout ($2.92) represents just 28% of the company's overall free cash flow per share ($10.41). Income investors should take comfort that Apple could cover its dividend expense several times over out of the cash it generates.

Dividend growth capacity

Since Apple pays out just 28% of its free cash flow per share in the form of a dividend, it could increase its payout -- and do so quite substantially -- by simply choosing to allocate more of its free cash flow to the dividend.

While I think this is a possibility, Apple seems to prioritize share repurchases because management thinks the stock is undervalued.

The good news, though, is that Apple's free cash flow per share has been trending up over the last 10 years (with some lumpiness here and there). So, if you believe that the company has significant growth potential left, then you'd have reason to believe that the company's overall free cash flow will go up as well. Even if Apple chooses to hold their cash dividend payout ratio constant, increasing cash flow would lead to further dividend increases. 

Another thing to consider is that Apple has been aggressively repurchasing stock and even announced that its board of directors had authorized yet another share repurchase program good for $100 billion worth of the stock. Share repurchases have the nice effect of increasing free cash flow per share because the share count comes down. Higher free cash flow per share should ultimately translate into a fatter dividend for stockholders. 

AAPL Average Diluted Shares Outstanding (Annual) Chart

AAPL average diluted shares outstanding (annual). Data by YCharts

So, with the combination of potentially increasing free cash flow, a shrinking share count, and room for Apple to funnel more of its free cash flow per share to the dividend, dividend growth investors should find plenty to like here. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$138.93 (1.62%) $2.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.