Apple, Inc. (NASDAQ: AAPL) announced last week it would increase its dividend 15% to $3.05 a share. Additionally, the tech giant will expand its share repurchase program to $60 billion from the $10 billion level. However, the company has opted to take on additional debt rather than tap its cash reserve.
We believe this is a smart move for Apple, as the company avoids a hefty tax bill by not repatriating offshore cash reserves. It also indicates that Apple has the cash flow to cover its research and development needs. We think the company is a cash cow, and operates in that manner. While the stock price has been beaten up by the markets, we believe Apple is a great buy.
Microsoft Corp. (NASDAQ: MSFT) was also a cash cow for years. The stock has been sluggish for nearly 12 years now. However, Microsoft has continued to pay a dividend, which is why many investors have continued to hold it.
We believe many technology companies were caught in the tech bubble and experienced pricing at 50- to 60-times earnings. Now that earnings are increasing, but stock prices are not changing, their price-to-earnings ratio is falling. Many may never again achieve their previous P/E ratios. But, that is not to say these technology companies shouldn’t remain core holdings.
We think investors need to consider the stocks on a total return perspective. Dividends add up over time, and total return accounts for both income from dividends and capital appreciation. About 40% of the broad markets’ return is dividends.
If you own a stock for more than 20 years and it never increases in value, but continuously increases its dividend by 8%-10% a year, the return on your original shares essentially doubles every seven years. If you purchased McDonald’s Corp. (NYSE: MCD) 20 years ago, you could feasibly be earning 20% in dividends on your shares.
If you are earning 20% on shares held for more than 20 years, when do decide to take the profit and invest elsewhere? First, we recommend an investor consider the stock on a total return basis. Investors also need to look at the current situation—if the company is still a good growth story, e.g., McDonald’s still has solid international growth prospects. On the other hand, if the stock has not increased in value, you likely have no capital gains—you then need to consider if you can find something better. In the case of Johnson & Johnson (NYSE: JNJ), the company was considerably strong for more than 20 years. However, recent missteps have caused investors to reconsider the holding. Additionally, a solid stock growth can force you to rebalance. As it grows, the stock becomes too large of a position in your portfolio, in which case you should trim the position to diversify.
At Henssler Financial we believe you should Live Ready, which includes understanding how dividend-paying stocks work in your portfolio. If you have questions regarding whether you should sell your dividend-paying holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
