This 50% Dividend Grower Is Hiding in Plain Sight

Michael Foster, Investment Strategist
Updated: February 10, 2017

There are two ways to get big dividends: you can buy stocks that boast high current yields, or you can buy stocks that consistently grow their payouts.

A well-balanced portfolio will include both types of companies, with dividend-growth stocks being the cornerstone of a longer-term income strategy.

Still, investors sometimes get frustrated with dividend growers because to get their outsized payout growth, you often have to settle for a low current yield. And why buy a risky asset that yields 1% when you can get a long-term Treasury that pays 2%?

There are two answers to this question. The first is that Treasuries aren’t risk-free. If you buy a 10-year note and interest rates go up, the value of your Treasury will go down. If you need to sell early for some reason, you’ll lose money.

Secondly, dividend-growth stocks will increase their income over time—something Treasuries will never do. In fact, if you choose the best dividend growth stocks, you’ll see your income skyrocket in a few short years.

And the best dividend growth stock is one of the world’s most recognizable and popular brands: Apple (AAPL).

If you read about investing in Apple, you almost always see a focus on iPhone sales, the value of future products and so on. Bears note slowing iPhone sales growth (or negative sales growth), devices that didn’t quite catch on and rising competition. Bulls counter that Apple has a valuable and unique market position and innovative products that captivate consumers.

Both arguments are really missing the point.

The main reason to buy Apple is more boring but more important: net income, free cash flow (FCF) and dividends.

Let’s start with FCF, which is now $9.65 per share, meaning Apple’s dividend-payout ratio is a measly 24%. But the really amazing thing is how the company’s cash flow has exploded and continues to rise:

FCF Boots Up

Yes, there’s been a bit of a dip in the last year, but you can also see that FCF has already bottomed out and is now back on the rise.

The next thing to consider is Apple’s operating margin, which is currently 27%. This is important because it means the company is so profitable that it can continue to pay out dividends at the current payout rate. That operating margin has fallen slightly in recent years, partly as a result of changes in the smartphone market, but it’s still historically high:

Apple Remains a Profit Monster

Note that we’ve seen Apple’s profit margin remain over 25% since 2009. This is great news for investors, but it also means Apple has become a very different company than it was in the 1990s and 2000s. It’s no longer a burgeoning tech firm but an enterprise that reliably and consistently produces cash it can distribute to shareholders. In other words, it’s a blue chip stock, not a speculative bet.

Again, great news for investors—especially those looking for income. Ironically, many dividend-growth investors forget about Apple, or they may allocate a very small part of their portfolios to the company out of fear that it’s risky. That’s a mistake.

In the last five years since Apple started paying dividends, its payout has soared 50.6%:

Strong Dividend Growth 

If we compare that to some of the most popular and supposedly “safer” dividend payers, we see that Apple’s dividend growth is a big outperformer:

Apple Trounces the Rest

As you can see, General Electric (GE), AT&T (T), Johnson & Johnson (JNJ), Chevron (CVX), Consolidated Edison (ED) and Exxon Mobil (XOM) are all growing their dividends at a slower pace than Apple. The tech giant also has a lower P/E ratio than all of these names (just 15.6, which is 39% lower than the rest of the S&P 500).

It’s time to think different about Apple; this is a relatively safe dividend stock that is destined to be a Dividend Aristocrat. While headlines about iPhone sales may cause some volatility in the short term, the company’s strong cash generation will reward you with big payouts in the long run.

Buy Apple Now … Then Add These 6 High Yielders

There’s no doubt Apple is a best-in-class dividend-growth stock. But you also need high yields to go with that dividend growth—especially if you’re in or near retirement.

That’s where the 6 reliable income generators in our new No-Withdrawal” retirement portfolio come in. They throw off rock-solid yields of 6%, 8%, 9% and up.

And with an average yield of 8.0%, this portfolio will easily hand you a $40,000 income stream on a $500,000 nest egg.

Each of those payouts is backed by rock-solid balance sheets and surging cash flows. Like Apple, these income powerhouses are all cheap now, but I don’t expect that to last.

These no-drama plays are perfect for 2017, with the market starting to look twitchy after the go-go “Trump bump.” Don’t miss out. Click here and I’ll share our 6 top picks for high income and double-digit upside.