Apple's Dividend Growth and Power of Compounding
Akira Kondo
May 2, 2014
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I have been a shareholder of Apple Computer (NASDAQ: AAPL) for many years while I started to collect dividends from Apple since August 2012. Apple is a typical tech company, which offers a decent growth from its business operation, and it is a favorite stock to watch and own among many fund managers across the globe. Fast growing tech companies rarely offer dividends to investors as they tend to focus on reinvesting the earnings into their research and developments. An iPhone marker, Apple, was used to be the company, which did not payout any dividends to investors.
In August 2012, Apple started to payout the dividends to investors for the first time (not actually the first time though) while investors claimed for the company’s huge cash position on its balance sheet. At that time when I heard the news, I could not believe that such a fast growing tech company paid out the dividends. On the other hand, I was excited to collect the dividends while I no longer needed to depend on Apple’s volatile stock price anymore. In fact, I have been very excited to receive the dividends from Apple every quarter, especially after shares of Apple was under pressure after the shares hit all time high at $700. The pure dividend itself is not important. This article will explain the power of compounding while using the example of Apple’s dividends. The company inaugurated its dividend payout to investors in August 2013 and the initial payout was $2.65 per share per quarter. If you owned 100 shares of Apple, you would pocket $265 every quarter or $1,060 annually (assume no taxes on dividends). It is a handsome dividend you can get every quarter (however, there are much more attractive dividend stock to own, such as MCD and BMY, which yield above 3 percent). However, it is not attractive to hold onto Apple shares if the stock price keeps falling or inflation hits the economy. The dividend yield, which allows you predict dividend collection in a percentage base and is comparable to banks’ interest rates or bond coupon rates, matters. In the mid-August 2012, shares of Apple were trading around $650 per share and the dividend yield was at around 1.63 percent (“$2.64 x 4 quarters” / $650). Then, the shares of Apple nosedived into $450 a share in the mid-February when Apple paid out its third dividend. The yield hit 2.35 percent, which was much higher and attractive than the original 1.63 percent (See the chart). |
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Source: Yahoo! Finance
Power of compounding Apple increased the dividend payout in the mid-May 2013 to $3.05 per quarter or $12.2 annually, up 15 percent from the past quarters. When owning a dividend paying company, the dividend growth all matters. Though some investors enjoy the fixed dividend amount for many years, it is not wise to do so. The 15 percent dividend increase is relatively high among stocks listed on the NASDAQ. However, its 15 percent divided increase has to happen every year to attract investors. On Apple’s balance sheet, more than 20 percent of the share price accounts for cash equivalent, which is convertible into cash right away. That said, Apple has no problem paying out dividends anytime and can increase its dividend annually for at least upcoming years. |
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 Source: NASDAQ
Assume Apple is going to increase its dividend amount by 15 percent every year. In 2013, the total dividend amount that an investor collected was $11.80 if he owned one share of Apple. Then, assume that Apple will increase the dividend pay by 15 percent to $3.51 per quarter. The investor then would collect $13.58 in 2014 (See the figure - Apple). If he held onto the stock till 2018, the dividend amount that he received would increase to $23.80. That is twice higher than the dividend collected in 2013. Again, the original dividend amount that he received in 2013 was $11.80 and he would receive $23.80 in 2018 if Apple continued to increase its dividend amount by 15 percent every year. Again, if you owned 100 shares of Apple, you would pocket $2,380 per year or twice higher than the original annual payout of $1,180 in 2013. This assumption that Apple increases its divided payout by 15 percent annually would conclude that the dividend amount you receive becomes doubled within five years.
Here, the rule of 72 is intact. If you divide 72 by the rate of inflation, bank’s deposit rate, or the dividend growth rate, in this case 15 percent, you will get 4.8. This 4.8 means it will take the price (again in this case the stock price) to double in 4.8 years. Thus, Apple’s dividend payout doubles to $23.80 from $11.80 within 4.8 years according to the rule of 72. Is possible that a company continues to increase its dividend payout by 15 percent over many years? The answer is YES. Let’s look at McDonald’s, the fast food franchise company everybody knows (See the figure – McDonald’s). The dividend growth rate of McDonald’s over past 10 years is very impressive. Its 10-year average growth rate is well above 20 percent. There is no reason the stock has attracted many individual and institutional investors. |
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 Source: NASDAQ
In fact, McDonald’s dividend growth decelerated into below 10 percent last year for the first time since 2009. However, what really matters here is the importance of power of compounding. Compounding dividend growth rate clearly gives you a better opportunity to collect growing investment income into the future. What are the other benefits you can have from the dividend growth? Your shares of Apple have limited downside risks. As long as Apple generates cash flow and has solid balance sheet, the company would continue to pay out the dividend every quarter. For example, shares of McDonald’s have experienced limited downside. The shares hit all time high at $103 in April 2013 and declined to $93 in October 2013 when the company struggled to deliver solid earnings. It is a 10 percent decline, which is acceptable for most investors while the company kept paying out above 3 percent dividend yield. Although MCD has a defensive nature, this stock’s downside is handsomely supported by its high dividend yield. The lesson here is that it is wise to choose the stocks that offer continuing dividend growth over time and those stocks should be in your portfolio to limit downside risks when the market is under pressure. There are many stocks that offer decent amount of dividend yields and you can find them by visiting financial websites, such as Yahoo! Finance, Bloomberg, Standard & Poor’s, and NASDAQ.
Akira Kondo is long AAPL. |
