When Apple (NASDAQ:AAPL) announced its intent to start paying dividends, the yield looked stingy at just 1.8%. The stock climbed another 18% over the summer, easily crushing the Dow Jones Industrial Average (DJINDICES:^DJI) and reducing the already soft dividend to an even thinner 1.5% annual payout.
But then the tide turned against Cupertino. Share prices plunged 31% in four months, leaving opportunistic income investors with a far stronger dividend proposition. If you bought Apple shares yesterday, you locked in a 2.2% yield -- all without Apple lifting a finger to boost or accelerate its payout schedule, fiscal-cliff worries and bulging coffers notwithstanding.
Even so, Apple still lags far behind chip supplier Intel (NASDAQ:INTC) and its 4.1% dividend yield. Microsoft (NASDAQ:MSFT) crossed the ford into value-investing land a decade ago and yields a respectable 3.4% today. So Cupertino hasn't exactly become the ideal income stock quite yet.
Apple did jump above IBM 's (NYSE:IBM) 1.8% yield, even though Big Blue strives to keep its direct shareholder returns as juicy as possible. All three of these Dow-bound tech stocks come with impeccable dividend-boosting pedigrees:
Does this make Apple a better dividend investment than IBM? I don't think so.
Apple's cash reserves may be without equal outside the world of big banks, and its current cash-generation powers are also unparalleled. But Apple has chosen to keep the vast majority of these riches close to the vest. The company is scheduled to return about $10 billion to shareholders over the next year, not counting Apple's habit of printing $700 million of new shares every year without ever buying any of them back. That's out of free cash flow of $43 billion.
By contrast, Big Blue spent a sum of $14.7 billion on buybacks and dividends over the last 12 months out of $16 billion in free cash flow. That's a 92% direct cash return to shareholders.
If Apple adopted buyback and dividend plans of IBM's caliber, Cupertino would yield a direct shareholder return of 8.3%. It would be the fourth-richest yield in the S&P 500.
There's ample opportunity for Apple to boost its payouts, especially since the company can fall back on more than $120 billion in cash reserves.
The Motley Fool owns shares of Intel, Apple, and IBM. Motley Fool newsletter services have recommended buying shares of Apple and Intel. Motley Fool newsletter services have recommended creating a synthetic long position in IBM. Motley Fool newsletter services have recommended writing puts on Intel. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.