Apple's (AAPL +0.15%) declining share price is making the stock a more attractive investment for dividend investors. After selling off recently, the tech giant's dividend yield has crept upward. Is it time for income investors to either get on board or add to their position?
The story behind Apple stock's decline
Apple shares have declined about 14% during the last two months. The sell-off has been driven primarily by worries that sales growth for its iPhone business is stagnating. In short, investors worry that Apple's conservative guidance for year-over-year revenue growth of about 2.5% for the its important holiday quarter, which is its first fiscal quarter of 2016, could signal the beginning of a sustained trend of tough comparisons for iPhone sales.
The iPhone, which represents about 63% of revenue, can more or less make or break Apple's annual performance. So, it makes sense for investors to spend some time speculating about how well the phone may fair in the future. But, as I recently argued, it seems the market has already priced in enough conservatism for potential iPhone sales growth headwinds. The stock's two-month decline puts shares trading near $104, or about 23% lower than its 52-week high. Trading near $104, Apple has a wildly conservative price-to-earnings ratio of just 11.3.
A solid investment for dividend investors
And now with the stock trading as low as it is, it is also beginning to look like a great investment for dividend investors. The company's dividend yield has risen from about 1.5% to 2% in just six months.
AAPL Dividend Yield (TTM) data by YCharts
Of course, 2% still probably isn't enough for income investors to jump out of their seats, but the value gets better when dividend investors consider the business and cash flow behind the dividend.
To illustrate the value in Apple's dividend, compare some of these key dividend metrics for Apple to dividend stocks Microsoft (MSFT 3.90%) and Procter & Gamble (PG +2.00%).
|
Company |
Dividend Yield |
Payout Ratio |
3-Year EPS CAGR |
|---|---|---|---|
|
Apple |
2% |
21.4% |
13.5% |
|
Microsoft |
2.6% |
84.5% |
(9.6%) |
|
Procter & Gamble |
3.4% |
61.5% |
(0.6%) |
When it comes to the income dividend investors will receive during their first year of buying any of these three stocks in relation to dollars invested, income from an investment in Apple would be the lowest. Its 2% dividend yield trails well behind Microsoft's and Procter & Gamble's, which are at 2.6% and 3.4%, respectively.
But Apple's continued demonstration of its ability to grow EPS by double digits annually, as well as the company's much lower payout ratio than Microsoft and Procter & Gamble's, suggests the tech giant has the best prospects for dividend growth, going forward.
Apple's conservative payout ratio of 21.4% is worth highlighting. A payout ratio is defined as the percentage of earnings paid out in dividend to investors during the trailing-12-month period. So, a lower payout ratio means a company is paying out a smaller percentage of its earnings to investors, leaving more room for increases in the future. With Microsoft's and Procter & Gamble's payout ratios at 84.5% and 61.5%, respectively, Apple's dividend clearly has far more wiggle room than these two popular dividend names.
On a final note, every investor -- dividend investor or not -- wants to buy a stock below its fair value when given the opportunity. And Apple's price-to-earnings ratio of 11.3, compared to Microsoft's and Procter & Gambles at 37.3 and 26.1, respectively, stands out as extraordinarily low, especially when considering both Microsoft and Procter & Gamble are struggling to grow EPS as Apple is proving to investors it can move the needle with ease.
Apple is not only a solid investment overall, but it's turning into a great investment for dividend investors, too. Not only is its dividend yield higher after a sell-off, but the company will almost certainly continue to increase its dividend meaningfully every year over the long haul.
