Looking for a dividend growth stock? Look no further than Apple

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Apple (AAPL 2.67%) aims to return a substantial portion of its additional cash to shareholders. Although the stock currently pays a low dividend yield of 0.6%, the long-term reward of owning a stock that pays growing dividends might surprise you.

In fact, Apple’s growing dividend could explain why the stock outperformed the S&P500 index over the past year. During market declines, some investors like to add money to stocks that pay regular and growing dividends. Here’s why Apple can weather a weakening economy and reward shareholders.

A recession won’t slow Apple’s dividend growth

With the economy weakening, now might not seem like the best time to buy Apple stock. After all, it hinges on selling expensive tech products that some consumers might not be able to afford if inflation stays high and unemployment rises. On that note, recent estimates point to declining smartphone shipments in 2022 across the market.

Although Apple reported 9% year-over-year revenue growth last quarter, management noted a negative impact from inflation. Additionally, the company expects the quarter ending June to reflect the impact of ongoing supply constraints, COVID-related disruptions, foreign currency headwinds and the pause in sales at the Russia.

Apple will release its fiscal third quarter results on July 28 after market close. Management expects gross profit margin to decline from 43.8% in the first half of fiscal 2022 to a range of 42% and 43%.

Despite the weak smartphone sales trend, Apple still increased its dividend payout by 5% to $0.23 per share earlier this year. Over the past five years, Apple’s dividend has increased by 46%.

AAPL Dividends paid (TTM) given by Y-Charts.

Apple can continue to increase the dividend in the face of weaker demand because it has a large customer base, with an installed base of 1.8 billion active devices. This reflects millions of customers purchasing new products and applications each year.

Over the past 10 years, Apple has returned $124 billion to shareholders in dividends, but that still leaves the company with $73 billion of net cash on its balance sheet. The company generated $105 billion in free cash flow (FCF) in the past four quarters through March.

AAPL Free Cash Flow Statement.

AAPL Free Cash Flow given by Y-Charts.

Free cash flow is the key ingredient that funds a company’s operations, eventual acquisitions, debt repayment and shareholder dividends. Since Apple’s FCF has grown so much in recent years, Apple could accelerate its dividend increases over the next few years.

The percentage of FCF it pays out as dividends – known as the payout ratio – has fallen from 25% to 14% over the past five years, meaning FCF has grown faster than capacity. of the company to distribute it.

AAPL Cash Dividend Payout Ratio Chart.

AAPL Cash Dividend Payout Ratio given by Y-Charts.

The Rewards of Dividend Growth

The gains from investing in a company that steadily increases the dividend, even if the yield is relatively low to begin with, can produce substantial returns over time.

Microsoft has paid a growing dividend since 2003, about twice as long as Apple, and illustrates the benefits of owning a dividend-growing stock over the long term. Excluding dividends, a $10,000 investment in the software giant at the end of 2002 would be worth $100,000 today. However, with dividends reinvested in more shares, investors would have $159,000.

Apple plans to increase the dividend each year. With a cash-generating business, a large customer base, and a cash-rich balance sheet, Apple can pay dividends for decades.

John Ballard has no position in the stocks mentioned. The Motley Fool holds posts and recommends Apple and Microsoft. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

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