The Dow Jones Industrial Average is an index of 30 large cap stocks that was first calculated in 1896. As its name implies, the index was originally focused on industrial stocks, but currently contains businesses from a wide variety of industries that have little or nothing to do with the industrial sector.
The Dow Jones is one of the two main large-cap indices in the United States (along with the S&P 500 Index) and is a great place to look for investment ideas.
Of the 30 stocks in the Dow Jones Industrial Average, tech giant Apple, Inc. (AAPL) might be the best stock for dividend growth. Thanks to its hugely valuable brand and growth potential, Apple is likely to raise its dividend by at least 10% each year.
A Cash Machine
Apple has become the largest company in the world by market capitalization, with the strongest brand in the world as well. Consumers love their Apple devices, and are willing to pay a premium for them. Apple’s revenue increased 15% over the first three quarters of 2018. Earnings-per-share increased 26% in the same time.
Apple is seeing great results across its product portfolio. It also holds tremendous pricing power, which has fueled its impressive growth. Last quarter, Apple’s iPhone unit shipments rose just 1%, but pricing power drove 20% iPhone revenue growth. Services are another emerging growth category for Apple. Its services business includes iTunes, the App Store, Apple Pay, and more. Services have become Apple’s second-largest business segment after the iPhone, and its services revenue increased 31% last quarter to $9.55 billion.
Apple’s revenue and earnings-per-share both set records for the June quarter. In addition, the company generated $47.64 billion of free cash flow over the first three fiscal quarters, a 19% increase from the same nine-month period last year. Apple’s cash flow generation gives the company the ability to shower its investors with cash returns.
Shareholders Raking In The Cash
Since Apple reinstituted its dividend in 2012, it has increased its dividend by approximately 11.5% per year on average. Going forward, there is a high likelihood Apple can maintain a 10%+ dividend growth rate for many years. Apple’s current dividend payout has room for growth. Over the first three quarters of the fiscal year, Apple maintained a dividend payout ratio of 22%. This is a low payout ratio with plenty of room for expansion.
Apple’s high earnings growth will also allow for the company to raise its dividend at a high rate. Earnings growth of 10% each year is within reach for Apple, from a combination of new product releases, price increases, share buybacks, and the benefits of tax reform.
Lastly, Apple’s massive cash hoard supports its dividend growth. The company ended last quarter with $243 billion of cash, cash equivalents, and long-term investments on its balance sheet. This amounts to approximately 23% of Apple’s current market capitalization, a huge amount of cash that Apple could tap for shareholder returns.
With a dividend yield of 1.3%, Apple is not among the highest-yielding Dow Jones stocks. However, due to its high earnings growth and strong balance sheet, Apple might be the best Dow Jones stock for dividend growth.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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