One of my favorite stocks, and likely a favorite of many others, is Apple (AAPL). Apple just seems to be a company that everyone loves but something that many people don’t know is that if you own shares, you’re actually collecting a pretty steady Apple dividend every quarter.
“But Andy, aren’t dividends only for old companies that are really just cash cows?”
I’ll be honest with you – I have flipped back and forth in my mind many times about my thoughts on dividends. Some people will use them as steady income streams for retirement or as a source of passive income, but I still have probably half a decade left of investing so I have a different mindset about dividends.
There really are a couple trains of thought that I think about:
1 – dividends are guaranteed return. Not in the sense that the dividend is guaranteed, but once you’re paid that dividend then it’s money that the company can never get back from you. Let me give you an example:
- You bought 10 shares of a company whose share price was $100/share for a total investment of $1,000
- That company pays a 4% dividend, or $4/share, on an annual basis (meaning $1 quarterly)
When you’re paid that first dividend of $1, then that is a locked-in, guaranteed return. You can never have that dollar taken away from you, so even if the stock goes completely to $0, you’ve really only lost $99, of 99% of your investment.
Sure, that’s still less than ideal, but if you’ve invested in this stock for say, 10 years, and the share price and dividend have never changed, then you would’ve been paid $40 in dividends so you’re only down 60%.
I know that 10 years of the share price and dividend never changing is no realistic, but for illustration purposes, that’s why people love dividends – it’s investing with a margin of safety.
2 – I am looking for companies that have a long runway for years and years of growth, so why do I want them to take money out of their pocket to pay shareholders? I should want them to reinvest those dividends back into the company!
Braden Dennis was on the podcast and talked about how he likes to find companies with a high Return on Invested Capital (ROIC) which in a way is really a measure of how effective management of a company is, and one of his favorites were Visa (V).
Well, I actually love Visa too and view them as my “favorite buy and hold for forever” stock, and they have a very high ROIC but they also pay a dividend! Albeit a small dividend, why are they paying out money if they’re efficient users of investing capital, aka if they invested more then they could grow the business faster, right?
So, those are really the two things that I go back and forth with in my brain when looking at dividends, and I know that it might seem like I didn’t talk about Apple at all but trust me – you’ll see where I am going with it.
So, like I mentioned, Apple pays a dividend – but how has the history of that dividend looked over the course of time?
Apple kinda has a weird past compared to some of the other companies that I have analyzed before like JNJ & MMM. Both of those companies are Dividend Kings while Apple definitely does not abide to that.
Apple paid a pretty consistent dividend from 1987 – 1995 but then took a significant hiatus, just to pick the dividend back up again in 2012 and pay it up to today, November of 2020.
So, why did Apple stop paying dividends in the 1990’s? Well, some people might not know this, but Apple actually was facing some significant headwinds early on with their company. They were trying to compete against the big dogs and they really were strapped for cash.
When you think about it, Apple really was a true disruptor (moving the world from CDs to MP3s), and anytime that you have a company like that, it’s going to take significant funding from the company, so paying out a dividend was just not in the cards.
Another reason is that you’ll frequently see these tech companies make acquisitions when they need to grow in a certain way rather than growing it organically. If someone is crushing a certain area of business that would greatly benefit your company, acquiring them might be cheaper AND more efficient.
Rather than spending years and years, and tons of money, trying to catch up, you can just acquire the company and essentially start to capitalize on those synergies immediately. So, Steve Jobs wanted to hold onto some cash:
“We know if we need to acquire something, a piece of the puzzle to make something big and bold, we can write a check for it and not borrow a lot of money and put our whole company at risk,” he said. “The cash in the bank gives us tremendous security and flexibility.”
I actually found a pretty cool Q&A from the International Business Times regarding Apple after they stopped paying their dividend in the 1990’s and before they started paying it out again to give some perspective of why a company might want to hold onto that cash.
If all that you do is look at the Apple Dividend History, you’re going to miss a lot of the data.
You can see below that the dividend looks pretty consistent up until the 1995 when it completely drops off, and then picks back up again in 2012:
But you can see that there is a massive drop off again in 2014 and then again in 2020 – what the heck is going on?
I don’t know about you but that’s pretty terrifying to see that sort of drop off.
Wait – 2020, must be COVID related – got it. Probably just something short-term and they’ll be back better than ever.
Wrong! Has absolutely nothing to do with COVID, and this is why it’s imperative to ALWAYS take a deep dive into the numbers to make sure that you understand exactly what is going on.
What actually happened is that Apple did a 4:1 stock split, meaning that your 1 share of Apple stock has now split into 4 shares. Of course, the stock price has also split by 4 and effectively the dividend has as well!
So, while you’re now only receiving ¼ of the dividend, you have 4x the shares, so you’re effectively neutral. Below is an example of exactly how this would play out if you owned 10 shares before the stock split, meaning you now own 40:
The total dividend is the exact same, so you haven’t been impacted at all. Although, weirdly enough, stock splits seems to really have a positive impact on share price like they did with Apple and with Tesla, so maybe other companies are soon to follow too?
Not only did Apple do a stock split in 2020, but they also have done many other stock splits over the years:
Stock splits are kinda cool despite there not being any true monetary change – I just think it’s fun to own more shares of a company! 100% psychological and no actual analysis, just opinion! Good thing I am an Apple shareholder!
If you had bought just one share of Apple prior to that first initial stock split, you would now have, well, let’s just say a lot of shares:
Can you imagine that? 1 share of Apple turned into 224 shares! You bought 1 share for Apple back in 1987 for $.35 the day prior to that first stock split and now you’re getting massive dividends. In fact, that 1 share is now making you $45.92/quarter… per QUARTER!
That is just freaking insane.
When I adjust the dividend for the stock splits, you can see that Apple is actually an extremely consistent dividend distributor since they reintroduced the dividend in 2012:
When looking at the chart, it almost seems a little bit flawed just because there was such a long period of no dividend, so I wanted to take a closer look at just that data.
I basically chose to reset the data and set it so that you only had one share when the first dividend was paid and then you participated in the 7:1 and the 4:1 stock splits.
If you had bought one share before on 7/23/2012, the day before that first dividend was paid, you would’ve paid $21.23. Over the last year, you would’ve recouped a total of $22.61!
In just a year, you have made back your entire investment only on dividends. In total, you would’ve made over $140 in dividends! That is a freaking insane return.
That’s something that I like to evaluate as just one of my own personal metrics as the “yield on cost”. It’s basically just what sort of dividend have I received over time based on the cost of the stock that I purchased. I like to do this on an annual basis, as well as total, merely just for my own benefit to see how that initial investment has done.
As you can see, the details are really extremely important in this example and an absolute requirement when you’re looking at the history of Apple and its dividend. If you were to simply just look at the dividend being paid out, you would miss an extremely large part of the story by not knowing that they have had multiple stock splits in their history as well.
The thing that is just so incredible is that when you see a sustained history of increasing dividend payouts, you might think that the dividend yield is growing quite a bit each year as well, but with Apple, it’s not.
Macrotrends provides some really good charts on historical data and one of the best charts that they show is with their dividend yield:
As you can see, the yield peaked in 2013 when they were really just starting to reintroduce the dividend and it has been on a steady decline lately, even in 2020 when you might think that the yield would spike due to stocks getting crushed by 30% in March.
To me, this is pure excitement. If the dividend is continuing to increase but the yield is continuing to increase, what does that mean? It means that the share price is increasing at a faster rate than the dividend yield is increasing – BINGO! JACKPOT! HOMERUN!
Not only are you the beneficiary of a stock that is continuously increasing their dividend, but they’re continually reaching all-time highs on their actual share price as well.
Purely from a dividend standpoint, this would make me very enticed as an investor because with that yield continuing to drop, there is more and more opportunity.
To me, I would view this as a great thing – because the yield is dropping, it would make me think that Apple has a lot of room to potentially grow their dividend even further.
When I look at the Payout Ratio chart that I found from discoverci, I was able to see that it has actually stayed really steady over history:
Excluding the early years of this Round 2 of dividends being paid out, Apple has stayed within the 21-28 range for their payout ratio, meaning that they pay out about 21-28% of their earnings as the form of a dividend.
Truthfully, this is a number that is much lower than some of the Dividend Kings that you might see that can easily get over 70%! In fact, there are even companies like XOM that are cutting their employee 401k match in order to keep that dividend going strong.
At the beginning of this article I was faced with a dilemma – to find a company with a great dividend or one that’s focused on growth. It turns out that Apple actually is both as they have a steady, growing dividend, a low payout ratio and a low yield!
From a dividend perspective, investing in Apple is a homerun! Now when actually start to look at the stock itself, that’s when I will head to the Value Trap Indicator!