Apple Won't Be A Dividend Favorite For Years

| About: Apple Inc. (AAPL)

So if you have been a long term shareholder of Apple (AAPL), have you been one of those investors screaming in recent months for Apple to start paying a dividend? If you are, how do you feel now? Apple has announced its intentions to start paying a dividend later this year, but is that why you own the stock? Think about it. Are you owning Apple because of a small dividend, or are you owning it because of things like the iPhone, iPad, and others?

Many were screaming for a dividend from Apple, and recently, their wish was granted. But as I stated a few weeks ago, this isn't a reason to really buy the name. Apple's dividend is relatively small, and isn't really a main part of the shareholder theory behind the name. If you are buying Apple, it is probably because of the close to 50% expected revenue growth this year, not because of the dividend. By the way, if you are waiting for that dividend, keep waiting. Apple isn't likely to pay the first one out for another 3-5 months. There will be a lot more important happenings with the company before then, like two earnings reports and perhaps the launch of the iPhone 5.

Apple is paying a dividend, but you really need to look at the scale of it to realize why it may take several years for this to become a "value" name. First of all, Apple is still growing tremendously, and even if it slows down to like 15% growth over the next few years, investors will still be buying it for its growth, and not for its value.

So let's look at the dividend, and then I'll compare it to some other names. Apple announced a quarterly dividend of $2.65, which translates to $10.60 per year. As I write this article, Apple is at $612.30, meaning that the yield on the dividend is just 1.73%. Now remember, the first dividend won't be paid until the July to September quarter, so by the time you see that $10.60, it could easily be September of 2013. That's 17 months from now.

It isn't the yield that really matters here, but the high stock price. Assume you bought 1 share of Apple for your son or daughter today. Now, assume that Apple increases the dividend 10% each year going forward. If you didn't buy any more shares, and Apple stayed at the same $612.30 price, it would take about 20 years for you to have enough cash to buy another share, and like I said, that is if Apple's price stays exactly the same.

Now, I the next table isn't the main part of my argument, but it forms the basis for it. It shows the current dividend of Apple (assuming it were to start paying now) versus some other dividend favorites. Now yes, we know Apple's yield is going to be smaller, because the dividend just started. But this information starts the main point.

Company Quarterly Dividend Annual Dividend Current Yield
Apple $2.65 $10.60 1.73%
McDonald's (MCD) $0.70 $2.80 2.86%
Verizon (VZ) $0.50 $2.00 5.21%
Philip Morris (PM) $0.77 $3.08 3.45%
Microsoft (MSFT) $0.20 $0.80 2.48%
Click to enlarge

Now a few of those are likely to raise their dividends this year, so it is possible that Apple will fall even further behind. But that isn't the main point I'm getting at. Income investors like to buy stocks with dividends, and reinvest that dividend money into more shares. Because Apple trades at such a high price, combined with the lower yield, it will take a lot of money to do that.

So let's say you want to own enough of the stock to repurchase at least one share every time you get a dividend. For purposes of this argument, I'm excluding taxes on dividends, which you should be taking into consideration as well. But the theory is still the same, it just changes the numbers a bit. The following table shows you how many shares you would need to own to buy another share of stock with the dividend money you receive.

Stock # of Shares $ Value
AAPL 231.06 $141,475.96
MCD 140.10 $13,739.61
VZ 76.80 $2,949.12
PM 115.90 $10,342.57
MSFT 161.30 $5,203.54
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You would need more than $140,000 of Apple just to buy 1 additional share each quarter when you receive your dividend. With Verizon, you need less than $3,000 of that stock. Remember, too, that this is only at current prices. If Apple goes even higher, you would need even more of the stock. For someone just starting a portfolio now, or someone buying shares for their children, I think there's a better chance of them being able to invest $3,000 to $5,000 than $140,000 in just one name.

Now, to use the same logic on the yearly dividend (buying 1 additional share with your dividend paid throughout the year), the math is simple. You just divide the number of shares needed by 4, and the value by that number as well. You don't need as much Apple to re-buy shares every year, but you can see that it still is way more than any of the other names. There's probably some people out their that have enough money in their wallet to buy enough Verizon to get at least one more share per year. A few thousand is reasonable, $35,000 plus or more is rather much.

Stock # of Shares $ Value
AAPL 57.76 $35,368.99
MCD 35.03 $3,434.90
VZ 19.20 $737.28
PM 28.97 $2,585.64
MSFT 40.33 $1,300.88
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So again, are you really buying Apple for the dividend? I surely hope not. Let's put it another way. Assume Apple starts paying the dividend on August 15th, which is roughly the midpoint of their fiscal fourth quarter, which is when they said they would start paying out to shareholders. If Apple were to increase the dividend by 10% a year going forward, you would get $14.11 in dividends for the calendar year ending August 15th, 2016. Based on Apple's current price, that would be a yield of 2.30%. But what if Apple rises to $1,000 by then (assuming no stock splits). Then, you are only at 1.41%. If Apple did get to $1,000 by then, and wanted to maintain that current yield of 1.73%, it would have to raise that dividend by about 18% each year over the next three years. Are you convinced that will happen?

Many were calling out Apple for not paying a dividend, and I hope they are satisfied now. However, if they think Apple is going to be a dividend favorite anytime soon, they are sadly mistaken. A less than 2% yield, combined with a very high stock price, makes it extremely hard to get more shares just from dividend proceeds, and that is assuming the stock doesn't rise even more. If you wanted to get one additional share of Apple each quarter from the dividend, you would need more than $140,000, and don't forget, we are still months away from even receiving a dividend. If you are a long term investor, you are buying Apple for its growth, and its great products and innovation. If you are buying a stock to accumulate more shares through dividends, you might want to look elsewhere. Maybe even consider one of the four other names I threw out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.