Apple Inc. (ticker: AAPL) is one of the most popular stocks on Wall Street, and for good reason.
The tech giant has a market capitalization of more than $800 billion that makes it the most valuable company in the world by that measure. And while Wal-Mart Stores ( WMT) and Exxon Mobil Corp. ( XOM) can top Apple’s annual revenue, sales north of $230 billion make Apple No. 3 on the latest Fortune 500 list.
This is all thanks to the high popularity and high margins behind its iconic iPhone. And once again, Apple is a Wall Street favorite as it approaches the all-important launch of its iPhone 8 this fall; shares of AAPL stock have soared more than 50 percent in the last 12 months.
While hype around its latest smartphone makes Apple popular among active traders, the tech giant is increasingly a top holding for many long-term dividend investors, too.
“Apple is a legitimate dividend stock,” says Rich Grasfeder, a portfolio manager at Boston Private.
[See: 10 ETFs That Pay Sky-High Dividends.]
He says the ups and downs in the stock caused by more active traders is “useful for investors reinvesting dividends” by buying shares on a dip and holding long term.
Eddy Elfenbein, portfolio manager of the AdvisorShares Focused Equity ETF ( CWS), says Apple can be a dividend play and that income investors don’t have to look solely for “old granny stocks” that offer income but little in the way of growth.
AAPL is a great alternative to traditional stocks that income-oriented investors buy, Elfenbein says, because it pairs dividends and growth — which means modest dividends now could become significantly larger over time.
“Too many investors ignore dividends, but they’re very important” in any investment, he says.
How Apple’s dividend grows. Consider the current dividend yield on Apple is 1.6 percent — significantly less than the 2.2 percent yielded by 10-year Treasury bonds or the roughly 2 percent yield of the Standard & Poor’s 500 index at present. But that dividend yield is just a snapshot in time. Calculated by taking the current annual dividend and dividing by share price, a dividend yield is an approximation of how much your initial investment returns in dividends across the next 12 months.
That, of course, presumes you hold for a year and that dividends remain constant. But what if you held longer — and what if dividends rise significantly?
That’s exactly what has happened with Apple.
In 2012, When Apple paid its first dividend since 1995, it was paying about $1.51 in annual dividends and trading for about $90 a share (adjusted for stock splits). Do the math and the dividend yield was 1.7 percent at the time — roughly the same as it is now.
But that dividend grew to $2.52 annually at present, about 67 percent larger. The real yield shareholders who bought in 2012 see is also larger, at roughly 2.7 percent.
Since dividend investing is necessarily longer term, and since dividends only come once per quarter for most companies, it’s important to keep in mind how this kind of dividend growth can significantly push up your yield over time.
As long as a company is dedicating more cash to its dividends, of course, instead of keeping them steady — or worse, cutting those payouts.
Hopes are high for future Apple dividends. Ron Weiner, a certified financial planner and managing director of RDM Financial Group at HighTower, is convinced Apple has the finances necessary to keep its payouts safe and grow them going forward.
He points to Apple’s dividend payout ratio, or the amount of profits it shares with investors. The total cost of Apple’s dividends is about $13 billion annually, but that’s still less than a third of the $50 billion or so Apple is expected to earn in total profits this fiscal year.
That leaves plenty of cash left over to pay shareholders bigger dividends, as well as finance innovation and growth.
Charles Sizemore, a portfolio manager on Covestor and founder of Sizemore Capital Management, also points to more than $250 billion in idle cash as another driver of future dividend growth for AAPL stock.
“It is almost cliche to mention it at this point, but Apple’s gargantuan cash hoard represents an almost unlimited source of future dividend and buyback funding,” Sizemore says.
He adds that while much of that cash is overseas and subject to taxes if used for dividends, continued talk of corporate tax reform or a tax holiday to repatriate that cash is encouraging.
[See: 10 Great Tech ETFs That Stay Under the Radar.]
Buying Apple stock for the dividends comes with risk. Of course, even if the dividend is safe and growing, that doesn’t mean Apple stock is a slam dunk. After a red-hot run in anticipation of a new iPhone launch, Wall Street analysts are increasingly worried that shares have gotten ahead of themselves and are priced for perfection.
Pacific Crest recently issued a rare downgrade of the stock on June 4. In a note to clients, the firm’s analysts warn investors were “giving relatively little weight to risks around gross margins, elasticity, supply issues, or the likelihood for declines beyond the iPhone 8 cycle.”
A significant drop in share price could cost you a lot of money in short order, which dividends may take many years to replace.
Also, it’s important to keep in mind that the iPhone is a dominant part of Apple’s stock performance. The smartphone accounts for more than two thirds of all revenue, says Rich Grasfeder at Boston Private.
“We know management is working on new products, but nothing appears imminent in the next couple of years that will be large enough to materially impact Apple’s revenue or earnings,” Grasfeder says.
Because of this overreliance on the iPhone, Weiner points to a classic “buy the rumor, sell the news” scenario surrounding the new device launching later this year. “Historically, (Apple) shares have tended to experience some profit taking following the introduction of new phones,” he says.
But even considering all this, Sizemore is more circumspect about the risks and notes Apple stock still has potential upside.
“Apple isn’t as cheap as it was a year ago, but it’s still very reasonably priced,” he says.
Shares trade hands at 14 times next year’s expected earnings, which is well below the market average, Sizemore adds.
[See: 10 Ways to Invest in Driverless Cars.]
“Apple is priced as if the only products it will ever sell are the iPhone or iPad. So, any innovative new product that comes out of Cupertino will be icing on the cake,” he says. “But even if Apple’s growth and innovation are only incremental from here, the stock is a cheap, cash-gushing machine that should outpace the broader market.”
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Why Apple Inc. (AAPL) Is a Buy for Dividend Growth originally appeared on usnews.com
