Retirees and other investors who desire income typically own dividend stocks. It's widely understood that dividend stocks are a good place to invest, because dividend yields in many sectors, such as utilities and consumer goods, are higher than the interest rates you'll find with other investment opportunities. What sometimes gets lost in the conversation are growth stocks, such as those in the technology sector. Investors don't typically associate high-growth stocks with income investments, but they shouldn't be overlooked.
In fact, retirees and other investors should remember that Apple (NASDAQ:AAPL) is one of the best dividend growth stocks to own.
Apple's dividend gets lost in the shuffle
The conversation regarding Apple as an investment often begins and ends with growth associated with its new product releases. Apple's recently unveiled iPhone 6, and the forthcoming Apple Watch, are dominating discussion in the financial media. Of course, there's good reason for that, because the company's fortunes rest largely on the success of its new devices. Rising enthusiasm about Apple's future growth potential has helped resulted in a significant rally in its share price: up 44% year to date, compared to just an 11% gain for the S&P 500.
The tech giant generated $50 billion in free cash flow in fiscal 2014, up 10% from the prior year. Income investors such as retirees benefit because Apple returns a portion of its cash flow to shareholders via a dividend.
With a current quarterly dividend payment of $0.47 per share, Apple's current dividend yield is 1.6%, which doesn't seem compelling. But that's still more income than you're likely to receive from many other sources. For example, the average 12-month certificate of deposit pays just 0.98%, according to Bankrate.com. That means you would earn 63% more income this year from owning Apple stock versus an average CD, and that spread seems likely to grow in the years ahead.
Why Apple investors will get lots of cash
The income investors will receive in the future will grow because Apple is likely to raise its dividend every year. The company has increased its dividend each year since instituting the payout in 2012, including a 7% boost in 2014. Going forward, double-digit dividend increases are definitely possible, as the company today distributes a low percentage of its cash flow in dividends. The $11 billion in dividends paid to shareholders in fiscal 2014 accounted for just 22% of Apple's free cash flow. That leaves plenty of room to expand.
In addition, Apple has $155 billion in cash and marketable securities on its books. This equates to about $26 per share. Apple could distribute some of this cash to increase shareholder value if it wanted to, which would be accretive, because Apple is probably earning very little on this cash in the current low interest rate environment. Just a few ways Apple could send even more cash to shareholders would be through additional share buybacks, a special dividend payment, or significant growth of the regular quarterly dividend.
Lastly, Apple's new devices are likely to produce even more cash going forward. Analysts expect the company to earn $7.69 per share in profit in the upcoming fiscal year. That would represent 19% growth year over year. With very little debt to service and low capital expenditures, these profits are going to increase Apple's cash hoard even more.
As far as dividend stocks go, income investors tend to pick companies among traditional sectors of the market, such as utilities or telecoms. These are valid choices, but income investors would also be wise to consider Apple. Investors looking for income get a decent payout now, and the potential for much more income down the road thanks to Apple's mountain of cash and innovation. It's time for Apple to be recognized as a great dividend stock.