Why Apple Is a Great Dividend Stock, Despite Its Low Yield

Key Points

• Apple generates around $100 billion of free cash flow per year, and it wants to give it back to shareholders.

• The company's dividend yield is less than half of the S&P 500's yield.

• The iPhone maker makes up for what it lacks in yield with dividend growth potential.

• 10 stocks we like better than Apple ›

One "siren's song" that lures in dividend investors all too often is an above-average dividend yield. After all, investors looking for income from their stock investments love to receive their dividend paychecks -- and the bigger they are, the better, right? Not necessarily.

Investors looking to bolster their portfolio with dividends should carefully balance the importance of share price appreciation potential, dividend yield, and dividend growth potential. Too much focus on dividend yield could mean missing out on long-term appreciation in the underlying stock price and/or meaningful growth in a company's dividend payments over time.

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Apple (NASDAQ: AAPL) is one of those companies that lacks in terms of dividend yield, but easily makes up for this weakness in other areas, particularly in terms of dividend growth potential.

Image source: Getty Images.

A small but mighty dividend

Today, Apple's dividend yield stands at just 0.5%. This compares to a dividend yield of 1.2% for the S&P 500 overall. So, it might be confusing why I'd call Apple a great dividend stock. But hear me out.

Let's start with this: Not only is Apple's dividend growing every year, but the company is only paying out a small fraction of what it could pay in dividends. Further, note that Apple's annualized dividend payment run rate of $1.04 today is double what it was 10 years ago and 27% higher than its annualized payments five years ago. More importantly, there's plenty of room for further increases in the years to come. Today, the company pays out just 16% of its earnings in dividends.

Another way to put Apple's dividend growth potential into perspective is to examine the company's cash flow statement. Despite generating around $100 billion in free cash flow (the cash left over after both regular operations and capital expenditures are taken care of) annually, the tech giant's annualized dividend payments over the last trailing 12 montamounted to only $15.3 billion.

All of this to say, the iPhone maker could actually increase its dividend at a faster rate than its earnings growth if it wanted to.

Returning cash to shareholders in more ways than one

Despite all this wiggle room for dividend growth in Apple's finances, it's possible that the pace of its dividend growth in the coming years will not exceed the rate of its earnings growth by much (if at all). This is because the company has an exceptionally strong appetite for share repurchases. In fiscal 2024, for instance, Apple spent $95 billion repurchasing its shares -- a figure that far exceeded its dividend payments of $15.2 billion during the period.

Further, Apple recently hinted that it will continue to prioritize share repurchases. Alongside its fiscal second-quarter earnings release on May 1, Apple announced that its board authorized an additional $100 billion for share repurchases. Additionally, during the company's fiscal second-quarter earnings release, Apple said that this authorization reflects management's "continued confidence" in its business "now and into the future." In other words, management appears to be suggesting that it believes its shares are undervalued.

However, at least modest dividend growth in the years ahead is all but inevitable. Apple has a history of increasing its dividend every year, and it is likely to continue doing so. Since initiating its quarterly dividend in 2012, the company has increased its dividend every year. Indeed, Apple management regularly tells investors that it plans to boost its dividend on an annual basis.

"[W]e continue to plan for annual increases in the dividend going forward as we have done for the last 13 years," noted Apple chief financial officer Kevan Parekh in the company's most recent quarterly conference call.

One thing we know for sure is that Apple will be returning a lot of cash to shareholders going forward. While it's difficult to predict exactly how much cash will go toward dividends and how much will go toward share repurchases, management has made it clear that it plans to keep aggressively returning cash by stating in its most recent earnings call that it is maintaining its long-standing goal to get to net cash neutral (when total cash and marketable securities equals total debt). With $133 billion in cash and marketable securities, about $100 billion in annual free cash flow, and about $98 billion in total debt, the tech giant will likely have to keep giving away sums in excess of $100 billion per year (via repurchases and dividends) for some time.

So don't underestimate Apple as a dividend stock just because it has a small dividend yield. It might be small, but it is mighty. It's backed by a cash-rich company with strong cash flows -- and there are plenty of reasons it can grow on an annual basis for years to come. The icing on the cake? The underlying business is high quality, and management is also returning cash to shareholders indirectly through share repurchases.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.