Apple (AAPL 1.27%) has been on a mission to return a substantial amount of its extra cash to shareholders. Although the stock currently pays a low dividend yield of 0.6%, the long-term reward of owning a stock that pays growing dividends might surprise you.
In fact, Apple's growing dividend might explain why the stock has outperformed the S&P 500 index over the last year. During market downturns, some investors like to add money to stocks that pay regular and growing dividends. Here's why Apple can weather a weakening economy and reward shareholders.
A recession isn't going to slow Apple's dividend growth
With the economy weakening, it might not seem like the best time to buy shares of Apple. After all, it depends on selling pricey tech products that some consumers might not be able to afford if inflation remains high and unemployment ticks up. On that note, recent estimates point to declining smartphone shipments in 2022 across the market.
Although Apple delivered 9% year-over-year growth in revenue last quarter, management noted a negative impact from inflation. Additionally, the company expects the June-ending quarter to reflect the impact of ongoing supply constraints, COVID-related disruptions, foreign currency headwinds, and the pause in sales to Russia.
Apple will report fiscal third-quarter earnings on July 28 after the market close. Management expects gross profit margin to dip from 43.8% in the first half of fiscal 2022 down to a range of 42% and 43%.
Despite the weak trends in smartphone sales, Apple still raised its dividend payment by 5% to $0.23 per share earlier this year. Over the last five years, Apple's dividend has increased 46%.
AAPL Dividends Paid (TTM) data by YCharts.
Apple can keep raising the dividend in the face of weakening demand because it has a large customer base, with an installed base of 1.8 billion active devices. That reflects millions of customers buying new products and apps every year.
Over the last 10 years, Apple has returned $124 billion to shareholders through dividends, but that still leaves the company with $73 billion of net cash on its balance sheet. The business generated $105 billion in free cash flow (FCF) over the last four quarters through March.
AAPL Free Cash Flow data by YCharts.
Free cash flow is the key ingredient that funds a company's operations, possible acquisitions, debt pay down, and dividends to shareholders. Given that Apple's FCF has grown so large in recent years, Apple could accelerate its dividend increases over the next few years.
The percentage of FCF that it pays out in dividends -- known as the payout ratio -- has fallen from 25% to 14% over the last five years, which means FCF has grown faster than the company's ability to distribute it.
AAPL Cash Dividend Payout Ratio data by YCharts.
The rewards of dividend growth
The gains from investing in a company that regularly raises the dividend, even if the yield is relatively low to start, can produce substantial returns over time.
Microsoft has paid a growing dividend since 2003, about twice as long as Apple, and illustrates the rewards of owning a dividend growth stock over the long term. Excluding dividends, a $10,000 investment in the software giant at the end of 2002 would be worth $100,000 today. However, with dividends reinvested in more shares, investors would have $159,000.
Apple plans to increase the dividend every year. With a cash-generative business, large customer base, and cash-rich balance sheet, Apple can pay dividends for decades.
