The market's highest-yielding stocks aren't always the best investments. Their yields could simply be high because their stocks crashed, and they might be spending more than 100% of their earnings and free cash flow (FCF) on their dividends -- which indicates a dividend cut will likely occur.

Instead of chasing high yields, investors should focus on well-run companies that can afford to double their dividends because they generate robust earnings and FCF growth. These companies might pay lower yields now, but their stocks will likely outperform sluggish high-yielding stocks over the long term. These three stocks fit the bill: Apple (AAPL 1.27%), Nvidia (NVDA -3.33%), and ASML (ASML -1.03%).

1. Apple

Apple started paying dividends again in 2012 -- more than 16 years after it halted its original dividend -- and it's raised that payout every subsequent year. But Apple only spent 15% of its FCF on its dividends over the past 12 months, and it pays a paltry forward yield of 0.6%.

Apple CEO Tim Cook with an iPhone 12 in the background.

Image source: Apple.

Apple's dividend remains low for two reasons. First, it prefers to spend its FCF on buybacks ($82.4 billion over the past 12 months) instead of dividends ($14.3 billion).

Second, Apple continues to spend its cash on refreshing its hardware products, expanding its software and services ecosystem, and investing in next-gen markets like augmented reality and connected cars.

But Apple already has plenty of cash to achieve those goals. It ended last quarter with $72 billion in net cash (and $194 billion in cash plus marketable securities), so it can easily afford to double (or even triple) its current dividend while dialing back its aggressive buybacks.

Analysts expect Apple's revenue and earnings to rise 29% and 58%, respectively, this year, as it sells more 5G iPhones and its services lock in more subscribers. Those are robust growth rates for a stock that trades at 28 times forward earnings, but boosting its dividend could make it even more appealing.

2. Nvidia

Nvidia also started paying dividends in 2012, but the chipmaker hasn't impressed income investors with its tiny forward yield of 0.08% and inconsistent dividend hikes. Nvidia spent just 7% of its FCF on those payments over the past 12 months, so it's clearly more interested in expanding its business than paying out big dividends.

That makes sense, since Nvidia needs to maintain its lead against AMD in the discrete GPU market while developing new high-end GPUs for data centers and driverless cars. It's also been inorganically expanding with its takeover of Mellanox last year and its planned purchase of Arm Holdings.

However, its proposed $40 billion purchase of Arm, the world's top mobile chip designer, has run into a wall of opposition from antitrust regulators. If that takeover fails, Nvidia could repurchase shares or boost its dividend -- as Qualcomm did after its failed takeover of NXP -- to appease investors.

Analysts expect Nvidia's revenue and earnings to rise 49% and 58%, respectively, this year, as it sells more gaming and data center chips. The stock remains surprisingly cheap at 12 times forward earnings, and a big dividend boost could make it an even more attractive investment.


The Dutch semiconductor equipment maker ASML started paying dividends in 2008 and has raised its payout annually over the past five years. It currently pays a forward yield of 0.4%, but it spent just 18% of its FCF on those dividends over the past 12 months.

ASML's dividends are low for two reasons. First, it favors buybacks over dividends, which used up $5.1 billion and $1.4 billion of its FCF, respectively, over the past 12 months. Second, ASML's stock roughly quadrupled over the past three years and reduced its dividend yield.

A silicon wafer.

Image source: Getty Images.

ASML dominates the market for high-end lithography machines, which TSMC, Samsung, and Intel all require to manufacture their smallest chips. The global chip shortage -- as well as escalating competition between the world's top chipmakers -- is fueling an insatiable demand for ASML's systems.

That's why ASML's stock skyrocketed, and why analysts expect its momentum to continue with 41% sales growth and 65% earnings growth this year. Its stock isn't cheap at 44 times forward earnings, but its position as a linchpin of the global semiconductor market arguably justifies that higher valuation. If ASML doubles its dividend -- which it can easily afford to do -- it could become an even more attractive investment while convincing longer-term investors to ride out its cyclical peaks and troughs.