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Why I Love This Dividend Stock

By Daniel Sparks - Oct 6, 2019 at 12:16PM

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With double-digit dividend growth, tens of billions of dollars in annual free cash flow, and over $100 billion of net cash on its balance sheet, this cash cow is a great investment for dividend investors.

When looking for a dividend stock to invest in, it's tempting to limit your search to well-known Dividend Aristocrats like McDonald's, AT&T, and Coca-Cola. Furthermore, many investors may only consider stocks with substantial dividend yields above 3%. But for investors willing to open up their search to more options, they may be surprised by what they find.

Apple (AAPL 0.03%) for instance, doesn't have a long track record of dividends and currently has a moderate dividend yield of just 1.4%. But for investors willing to look beneath this surface-level view, the tech giant is a very compelling investment -- even for dividend investors.

Here are four reasons why I love Apple as an investment for income.

A chalkboard sketch of a bar chart with an arrow highlighting a growth trend

Image source: Getty Images.

1. Its dividend is growing rapidly

Apple's dividend history is short but still meaningful. The company has been paying out dividends for seven years, since it initiated the quarterly payout in 2012. Notably, however, the tech company's dividend growth has been strong over this time frame.

In 2012, Apple was paying out a split-adjusted quarterly dividend of $0.38 per share. Seven years later, Apple is paying out $0.77 every three months. This translates to average annualized dividend growth of 10.6%. Not bad.

And Apple has kept up its strong dividend growth in recent years. The company increased its dividend by 16% in 2018 and 5% in 2019. This converts to an average dividend increase of 10.6% over the last two years.

2. Apple has a low payout ratio

Better yet, Apple's dividend growth looks like it can easily be sustained. The company is currently only paying out 25% of its earnings in dividends. This means that Apple not only has wiggle room for its current dividend but also has significant room for dividend increases in the coming years.

3. Free cash flow is enormous

Of course, when discussing a company's ability to pay out (and grow) its dividend, nothing beats taking a look at how cold, hard cash is faring on the company's cash flow statement.

Apple is a cash machine. In the trailing-12-month period ending June 29, Apple raked in $58.2 billion in free cash flow, or cash from operations less capital expenditures. Of this free cash flow, the company paid out just $14.1 billion in dividends.

4. Apple has $102 billion of net cash

Giving investors even more comfort in Apple's ability to keep increasing its dividend, the company has a net cash position of about $102 billion. Given that its goal is to eventually get to net cash neutral, where the company has an equal amount of cash and debt, Apple is going to have to keep increasing the amount of capital it is giving to shareholders in the coming years.

Of course, Apple has historically devoted the bulk of its capital return programs to share repurchases -- and it will likely continue to do this as long as shares are trading at a conservative valuation (like they are today). But with seven consecutive years of dividend increases behind it, dividends are clearly a priority to management as well.

Looking ahead, Apple looks well positioned to grow its dividend at an average annualized rate in the high single digits for the foreseeable future.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$164.92 (0.03%) $0.05
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$260.06 (1.27%) $3.26
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.10 (0.56%) $0.10
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.05 (0.13%) $0.08

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

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