This Stock Has an “A-Rated” Dividend and Generates Tons of Cash

When I began my career in the markets, tech companies were all the rage.

Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC) and Cisco Systems (Nasdaq: CSCO) were just a few names that were buzzing at the time. Later on came Apple Inc. (Nasdaq: AAPL).

Back in the ’90s and early 2000s, they were equivalent to today’s Facebook (Nasdaq: FB), LinkedIn (NYSE: LNKD) and Twitter (NYSE: TWTR).

[ad#Google Adsense 336×280-IA]Somewhere along the line, those tech stocks from yesteryear grew from white-hot explosive growth opportunities to mature businesses with steady and predictable income.

As that process occurred, they began to pay dividends.

In fact, currently, their yields are fairly good by today’s standards.

The lowest yield of the four tech stocks, but the one with perhaps the most room to grow, is Apple.

And it’s the focus of this week’s Safety Net thanks to Dorothy, who requested that I take a look at the safety of Apple’s dividend.

The stock currently yields 2.1%. Its recent 7-for-1 stock split has no effect on the yield or dividends paid. After the split, shareholders can expect $1.88 per share in dividends on an annual basis. Of course, if you owned the stock pre-split, you have seven times as many shares as you did before.

Apple raised the dividend in May by 8%. The company has paid a dividend since 2012, but only after pressure from shareholders. It has raised the dividend in May both last year and this year.

Cash Flow out the Wazoo
One thing Apple can do is generate tons of cash. Over the past 12 months, the company produced $46.7 billion in free cash flow. During that period, it paid out $11 billion in dividends.

That’s a paltry payout ratio of just 24%. The company could literally double its dividend, giving investors more than a 4% yield, and still be paying out less than half its free cash flow in dividends.

As a point of reference, I like to see the payout ratio be below 75%.

Furthermore, free cash flow is projected to grow significantly over the next four years, particularly in 2016 and 2017.

Of course, there is no guarantee that Apple will match the forecasts, but even if free cash flow stays the same, there is a huge amount of room for the company to raise the dividend.

And don’t forget: Apple has a war chest of cash.

It currently has more than $41 billion in cash on its balance sheet and more than $100 billion in cash and securities that are primarily held overseas.

Though it doesn’t have much of a dividend track record to boast of, its free cash flow generation and the mountains of cash practically spilling out of its offices make it hard to see how or why it would cut the dividend in the short to medium term.

Even if things go horribly wrong and the iPhone 6 and other new products are a huge bust, free cash flow would have to absolutely collapse before it made sense to cut the dividend.

I expect Apple to be a dividend grower for the foreseeable future.

Dividend Safety: A

Marc Lichtenfeld

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Source: Wealthy Retirement