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1 Top Dividend Stock to Buy in May

By Daniel Sparks – May 12, 2020 at 11:44AM

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Looking for more stability in times of uncertainty? Consider buying shares of this tech stock.

The market's recent downturn likely shook some investors to their core. For those who found out that volatility scares them more than they anticipated, a good way to help offset some of the pain is with high-quality dividend stocks. The best dividend stocks can afford to pay quarterly cash payments to shareholders -- even when their share price is down. Further, many dividend stocks can even grow their dividend payments during times of economic weakness.

Apple (AAPL -2.32%) is a great example of a dividend stock that can help mitigate the damage of plummeting stock prices in a portfolio. In fact, the company recently proved it can not only maintain its quarterly payout but also boost it during tough times, as Apple did exactly that late last month when it announced an increase to its regular dividend.

Here's a closer look at Apple's dividend -- and why investors looking for reliable income to help offset their portfolio's volatility may want to consider buying shares of the tech giant.

A person hitting a keyboard key that has the word buy on it

Image source: Getty Images.

Apple's strong dividend

At a time when many companies are cutting or even suspending their dividends, Apple announced on April 30 that it was increasing its quarterly dividend payout by 6%. On an annual basis, Apple's quarterly payments total $3.28 per share. This gives the tech company a dividend yield of about 1%.

While Apple's dividend yield is small, investors can take comfort in how dependable this payout is thanks to the company's heady free cash flow. Consider that of Apple's $66.6 billion in trailing-12-month free cash flow, only $14 billion was paid out in dividends. Adding even more cushion, Apple boasted $99 billion of net cash on its balance sheet. No wonder Apple felt comfortable increasing its dividend.  

Sure, Apple's business is taking a hit during the pandemic. With COVID-19 impacting China in January and February, Apple cut its guidance for fiscal Q2 in mid-February and ended up reporting only 1% year-over-year revenue growth. Further, analysts believe this top-line trend will worsen to a 3.7% year-over-year decline in revenue during the current quarter as Apple continues to cope with a weakened global economy and many store closures. But Apple's significant positive free cash flow and its huge net cash balance are more than enough to help the company weather this storm.

A compelling valuation

But what's even better about Apple stock is that it's attractive even without its dividend. The company's price-to-earnings ratio of about 25 isn't a steep price to pay for a tech company with a long track record of earnings-per-share growth and an extremely loyal customer base.

In addition, the most attractive part of Apple's business can be easily overlooked. On the surface, Apple is a hardware business that makes money from difficult-to-predict hardware revenue, such as sales of its iPhone, iPad, and Mac businesses. But a closer look reveals that the tech company is morphing hardware sales into a large base of active users who can be monetized through various services. For instance, users can buy apps or subscribe to apps in the App Store and pay for Apple's own services like iCloud, Apple Music, and Apple TV+. Further, Apple generates revenue from App Store advertising. And these services are likely just the beginning. There will always be new ways to monetize this loyal customer base. 

The company now has an installed base of more than 1.5 billion active devices. This growing base of devices represents users that Apple can monetize -- and the company is doing it expertly. Services is Apple's second-largest segment. In fiscal Q2, services accounted for 23% of revenue and grew 17% year over year. Even more, since the segment is more lucrative than the rest of Apple's business, it generated 39% of the company's gross profit during the period.

With a reliable and growing dividend and a thriving services business, Apple shares look like a good deal for investors willing to hold for the long haul.

 

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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