As every dividend investor knows, there's more to a dividend than its current dividend yield. Another key area to look at is a dividend's growth potential. And it's on this front that Apple's (AAPL 0.27%) dividend stands out. Since the tech giant initiated its dividend in 2012, its split-adjusted quarterly dividend payment has increased from $0.38 to $0.52 -- and similar rates of dividend hikes look poised to continue over over the long haul. This growth potential makes Apple's uninspiring 2% yield, with shares trading at $103, more enticing that it might initially seem.
iPhone 6s. The iPhone generates more cash for Apple's business than any other product. Image source: Apple.
Huge room for increases
Why should investors expect Apple to continue increasing its dividend?
1. Apple has more cash than it can spend. On Apple's balance sheet, the company has $216 billion in cash, cash equivalents, and marketable securities -- or about $39 per share. This is significant considering Apple trades at just $103 at the time of this writing. Then there's Apple's annual free cash flow, or cash from operations less capital expenditures, of $63 billion.
At the rate Apple is currently paying out dividends, it's going to take a while for the company to begin making a dent in its cash-rich balance sheet. During the trailing 12 months, Apple paid out $11.7 billion in dividends. While this is large in absolute terms, it represents just 18% of its free cash flow. There's plenty of room, therefore, for further dividend increases in the future.
2. Management has promised annual increases. Since initiating its dividend in 2012, Apple has promised at least two times to continue to increase its dividend on an annual basis. The first time was in 2014 when the company said in its press release about its dividend increase that year that it "plans to increase its dividend on an annual basis."
Apple CEO Tim Cook promised yet again, during the company's annual shareholder meeting earlier this year, to boost the company's dividend annually.
What could Apple's dividend growth look like?
Given that Apple is currently paying out just 18% of its free cash flow, and only about 22% of its net income, in dividends, there's no reason the company couldn't keep up its current annual rate of dividend increases over the next five years.
Currently, Apple is averaging an 11% dividend increase every year. If Apple were to maintain this annual rate of dividend increases, its total annual payout of quarterly dividends would increase from $2.03 in calendar 2015 to about $3.42 in 2020.
Data for chart retrieved from SEC filings for quarters shown. Chart source: Author.
A dividend payment this high by 2020 would represent a 68% increase from today's levels. And annual dividends at this level would represent a 3.3% yield on today's cost basis. Further, if this scenario were to play out as outlined here, Apple's total annual dividend payout in 2020 would only represent about 31% of the company's current annual free cash flow. In other words, even if Apple's free cash flow stagnates at current levels and never grows any higher, the company could easily continue increasing its dividend at double digit rates for years to come.
Apple might not be a high yielding dividend stock, but its dividend's growth potential makes it a solid bet for income investors.
Apple plans to announce a dividend increase in April, when management reports its second-quarter results.
