Many investors see dividend stocks and growth stocks as two different entities. If a company was still growing quickly, it was reinvesting all of its earnings back into the business instead of handing out cash to shareholders. So when a company starts paying a dividend, it can be seen as a sign the days of high growth are over.
But that's not always the case. In fact, management's decision to start paying a dividend can be a sign that a lot more earnings growth is yet to come. It's a sign of confidence that the company will have at least a baseline level of earnings going forward, such that they can afford to pay something to shareholders while reinvesting in the business. And in the case of tech companies, which often benefit from growing scale, it can signal the start of a great investment opportunity.
Case in point: Apple (AAPL +2.65%). The tech giant reinitiated its dividend in 2012 when it was already the largest company in the world by market capitalization. But if you had invested in the company after it announced plans to reinitiate its dividend, you would have handily beaten the market.
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Apple went from big to huge
Apple investors have seen a lot of new products and services from Apple over the past 12 years, but Apple's business is largely the same as it was 12 years ago.
In 2012, more than half of Apple's revenue came from iPhone sales. In 2023, more than half of Apple's revenue came from iPhone sales. The big difference: iPhone sales went from $80 billion to $200 billion.
The iPhone remains the center of Apple's business, and that doesn't look like it's going to change anytime soon. It presents an entry point for consumers into the Apple ecosystem, which includes additional devices like wearables (Apple Watch, AirPods) and Mac computers as well as services like iCloud, Apple Music, and the App Store.
By far the biggest change at Apple since 2012 is the rise of its services business. Apple's services generated $85 billion in revenue last year. That's up tenfold from 2012. That growth stems from strength in the App Store, Apple's subscription services like iCloud, Apple Music, and Apple TV+, and a lucrative default search engine deal with Alphabet's Google.
NASDAQ: AAPL
Key Data Points
It's also worth pointing out that Apple hasn't slowed its investments in the future of the business despite returning billions in cash to shareholders. Research and development expenses grew from $3.4 billion in 2012 to almost $30 billion last year. Apple's latest efforts include bringing more of its chip designs in-house, developing artificial intelligence capabilities, and its new augmented reality headset called the Apple Vision Pro.
Here's how much a $1,000 investment would be worth today
Apple announced its plans to reinitiate its dividend on March 19, 2012. The day after the announcement, shares traded around $600 each. If your broker allowed for fractional share trading at the time, you could've bought one and two-thirds shares for $1,000.
Since then, Apple's split its stock twice. It split 7-for-1 in 2014 and 4-for-1 in 2020. As a result, you'd have 46 and two-thirds shares today from your original $1,000 purchase. Those shares are worth about $8,700.
But there's more to the story.
Over the past 14 years, you'd have received $361.65 in dividend payments. That brings your total return to more than nine-fold your original investment. But you could have done even better if you reinvested those dividends in more Apple shares as you received them. If you'd done that, you'd now have about 55 shares worth approximately $10,300.
If you'd instead invested your $1,000 in an S&P 500 index fund, you'd have about $4,500 today if you reinvested your dividends. That's nothing to sneeze at, but it's still less than half of what you'd have by investing in Apple.
AAPL Total Return Level data by YCharts
What's next for Apple?
Apple is a cash-generating machine. It generated an average of over $100 billion in free cash flow annually for the last three years. On top of that, it's still sitting on a net cash position of around $65 billion. Management's goal is to reach net cash neutral, where the cash on its balance sheet is equal to its debt. So, there's a lot more cash coming to shareholders.
After a slow 2023, Apple's poised to return to revenue growth. It's just starting to release generative AI features like its new image editing tool and the first shipments of the Apple Vision Pro went out earlier this month. Both could transform the company going forward.
Apple's stock performance is an excellent example of how initiating a dividend doesn't mean a company is done growing. Since reinitiating its dividend, Apple's produced several more hit consumer electronic products. It's also dramatically expanded its services business, and it appears to have a strong pipeline for growth into the future, as it's increased its R&D budget tenfold. Investors have been rewarded not just with dividends, but with strong stock price appreciation.
Apple's results should give investors confidence that a well-run company's stock can continue to deliver market-beating results after initiating a dividend. Investors looking for an opportunity like Apple in 2012 might want to take a closer look at Meta Platforms. The company just initiated a dividend alongside its fourth-quarter earnings release.
