Dividend investors often look for companies with long histories of increasing dividends when choosing dividend growth stocks. While I agree that a company's demonstrated commitment to growing its dividend is nice, using it as an absolute requirement may preclude one from investing in companies with truly phenomenal dividend growth potential. After all, isn't it the future dividend stream that counts when investing today?
Apple (AAPL) is a prime example. It hasn't paid a dividend since 1995, but with the board's decision to reinstitute a dividend in their fourth quarter (July-September), Apple should be on the radar for dividend investors looking for a growing income stream. At the proposed rate of $2.65 per quarter, the yield would be about 1.8%. Although not high in comparison to many others, it's the potential for growth that makes it attractive.
Apple's prospects for future dividends look strong due to two factors: its large cash hoard and strong earnings growth.
As of the most recent quarterly report, Apple has $28.5 billion in cash and short term investments and an additional $81.6 billion in long term investments. The new dividend would cost about $10 billion per year. Apple could pay this for more than 10 years just out of its cash hoard.
But, Apple will not need to pay its dividend out of its cash hoard. With earnings per share estimated to come in at $46.90 for the current year, the $10.60 annual dividend represents only a 23% payout ratio on earnings. Apple continues to add to its cash hoard.
As for earnings growth, Apple's history is quite remarkable:
Although the history is known, Apple's future earnings may be difficult to predict. In contrast to a company like McDonald's (MCD) which has relatively steady and predictable income streams, Apple is highly dependent on continuous innovation. I don't know of anyone that knows just how many new and innovative products Apple will release and how those will be received by consumers. If it fails to maintain its lead in this respect, earnings will likely plummet. But, if you believe in Apple's ability to continue innovating into the future, it will continue to have plenty of cash to return to shareholders.
Without a history of paying dividends, it is yet to be known if Apple is committed to dividend growth. But, with its large cash hoard and ability to generate cash in the future, Apple is in a position to grow its dividend at an exceptional rate for years to come. If it decides to do so.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.
Additional disclosure: This article is for informational purposes only and intended to highlight areas of interest that may warrant additional research. It is not intended as a recommendation to buy or sell any security.
