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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 15, 2016
Courtesy Apple Inc.
There's a well-worn playbook when it comes to selecting stocks for retirees' portfolios. Giant value stocks, preferably blue chips, with strong balance sheets, dependable dividends and a history of hiking those payouts are usually the go-to picks. Ordinarily, such names are found in defensive sectors such as telecommunications, utilities and consumer staples.
Against those criteria, Apple (symbol AAPL) wouldn't appear to be a good fit. Long considered a growth stock, it's situated in the more volatile technology sector. After all, tech stocks are always at risk of being disrupted. Today's darlings are too often tomorrow's afterthoughts. Besides, Apple has only paid a dividend for a handful of years now, and it's not all that generous relative to its profits.
Yet there's a strong argument to be made for Apple as part of a diversified retirement portfolio. From cash stockpiles to valuation to the sheer strength of its brand, Apple is poised to be an income machine. Consider these three reasons why.
Prices and related figures are as of December 7, unless otherwise indicated.
401(K) 2012 via Flickr
Apple's liquid holdings are legendary. The tech behemoth had more than $237 billion in cash and securities at the end of its most recent quarter (ended September 24). Much of that cash is held overseas, but the incoming Trump administration is talking about cutting taxes on repatriated earnings.
Either way, it's an astonishing figure. More remarkable is how fast Apple is building up its cash hoard. For the 12 months ended in September, Apple generated free cash flow – the cash profits left over after a company makes the capital expenditures needed to maintain the business – of $44 billion after paying interest on debt, according to S&P Global Market Intelligence. Apple's cash situation gives it tremendous flexibility. Raise the dividend? Buy back stock? Execute a bold acquisition? Apple can afford all three.
Most important, you can rest assured the dividend will keep coming.
Gushers of free cash also mean Apple has ample room to boost its dividend – and, boy, has it ever. The company has hiked its payout every year since it brought back the dividend in 2012.
Indeed, over the last four years Apple has raised its dividend annually by an average of more than 10%. Regular dividend hikes are a key to successful income investing because of the way they increase the yield on the original cost basis. (Dividend yield is calculated by dividing the annual dividend per share by the share price.) The dividend might rise but the price you already paid for shares won't.
True, at the current payout, Apple's dividend yields just 2.0%, about the same as the yield of Standard & Poor’s 500-stock index, which is certainly no fount of dividends. But a series of hikes will create ever-higher yields on your initial investment. Consistent and ample dividend increases are an often-overlooked aspect of income investing.
Apple is ostensibly considered to be a growth stock, but it's sure not priced like one. Shares are changing hands at a bit more than 12 times estimated year-ahead earnings. The S&P 500 is more expensive than that, at a forward price-earnings ratio of 17. Moreover, it's not hard to find stocks in the classic value sectors of telecommunications and utilities that are pricier than Apple.
If anything, Apple looks like a value stock. The knock on the name is that iPhone makes it a one-trick pony and its smartphone sales are slowing down. Fine. As long as consumers stay within the Apple ecosystem – and they are famously loyal to the brand – upgrades and replacements will ensure steady, if not spectacular, revenue growth. Think of it like an annuity, which is acceptable for a value name.
Finally, don't underestimate Apple's ability to innovate. It's been left for dead before. And if it can't find another hit like the iPhone and iPod before it, it can always afford to buy one. The market might just be too down on Apple's prospects.
Apple is a cheap, steady dividend payer with a good track record of raising its payouts. As a tech stock, it's not as correlated with movements in defensive sectors such as consumer staples, telecoms or utilities.
Add it all up and Apple looks like a fine way to slip some diversification into your income portfolio during retirement.