If Steve Jobs were still alive, it's easy to imagine that he wouldn't be happy with the recent news out of Apple. He, along with Warren Buffett, Michael Dell and other keen business minds, know that paying a dividend isn't the best way to add value to stockholders' shares, but that's what Apple did. At the current share price, the $2.65 quarterly dividend would equal a yield of 1.7%, nothing that would make hard core income investors place Apple at the top of their list, but there could be more than one reason why Steve Jobs would probably throw one of his famous temper tantrums if he were still here today.

SEE: Value Investing: Common Alternatives to Value Investing.

Taxes!
Dividends make us all feel good. They're called the only free lunch in the investing world, but if you were offered a free lunch providing you paid 15% of the check, would you still call it free? Along with dividends comes the dividend tax. On most cash dividends the tax rate is 15%, so if you're holding Apple in your non-tax deferred account, you're paying that tax each year.

If that isn't bad enough, unless Congress acts to change things, the dividend tax rate is set to triple. Now your free lunch is only free after you pay as much as 45% of the bill. The CEOs who have not bowed to public pressure understand that by paying a dividend they're giving the Federal government 15% of their cash hoard and possibly a whole lot more next year. In an economy where cash is hard to come by and investors measure a company's value by the amount of cash they have on their balance sheet, why give it away? In Apple's case the pile of cash was getting too high, causing investor outcry, but are there better ways to put that money to work?

SEE: Dividend Tax Rates: What Investors Need To Know.

Why Did They Do It?
Rumors have floated around Wall Street that Apple's nearly 74% gain in the past year is largely due to the rumor that Apple would initiate a dividend. Could that be why the day the dividend was announced the stock was met with a tepid response from investors? Since the announcement, Apple's stock is up just over 1%, making investors believe that the dividend was priced in already.

Share Buyback
Determined to ask, "what would Steve do?" it appears that Apple got their answer, and it's a good one if you subscribe to the Warren Buffett ways of managing your stock. Along with the announcement of the dividend, Apple instituted a $10 billion share buyback that will start in October and last for three years, according to the March 19 announcement. By decreasing the amount of shares outstanding, the value of those shares rises, but the investor takes on no tax burden. Warren Buffett's company, Berkshire Hathaway, even went so far as to announce the maximum price they would pay for each share in their buyback program, providing an instant boost in value.

Sign up for The Warren Buffett Watch newsletter.

Does This Change Anything?
A recent CNBC survey found that more than 50% of all American households have an Apple product, and with the New iPad setting a fresh round of sales records, there's little doubt that Apple remains a momentum stock. Morgan Stanley recently lifted Apple's price target to $720 and went as far as to say that we might see $960 sometime next year.

At those prices, the 1.7% yield would reduce to 1.1%, surely causing investors to call on Apple to increase its dividend and possibly accelerate its share buyback, but is Apple transforming in to an income stock?

SEE: Your Dividend Payout: Can You Count On It?

The Bottom Line
Apple is still arguably the most popular stock in the world, not just because of its meteoric rise, but because it has changed the way we use technology. Old tech may have seen a resurgence as of late, but no tech name comes close to the quality of Apple - at least not right now.

SEE: Cheap Stocks Or Value Traps?

Related Articles
  1. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  2. Mutual Funds & ETFs

    ETF Analysis: Utilities Select Sector SPDR

    Learn about the Utilities Select Sector SPDR ETF and the benchmark index it tracks, and understand what type of investors may be interested in the fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares International Select Dividend

    Learn how the iShares International Select Dividend ETF provides investors an opportunity to gain exposure to high-quality companies outside the United States.
  4. Investing Basics

    How Do You Find Penny Stocks That Pay Dividends?

    Learn about how investors can use online stock screeners to obtain a list of dividend-paying penny stocks for their consideration.
  5. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  6. Fundamental Analysis

    Bet on this U.S. Automaker for Long-Term Gains

    Ford holds a stronger technical position than General Motors and also pays a consistent dividend. This combination could mean greater 3-to-5-year returns.
  7. Stock Analysis

    2 Stocks to Bet on the Future of Space Exploration

    Learn about why investors must wait to invest in Space X, and read about other companies involved in the future of space exploration.
  8. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  9. Professionals

    How Does Tim Cook's Management Style Differ from Steve Jobs?

    Understand the differences between Tim Cook and Steve Jobs. Learn if the perceived differences makes Cook a good or bad leader and CEO.
  10. Mutual Funds & ETFs

    What You Need To Know About Bond ETF Yields

    When it comes to fixed income investing, yield is an important component of a bond investment’s total return to accurately assess if it's the right move.
RELATED TERMS
  1. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  4. Record Date

    The cut-off date established by a company in order to determine ...
  5. Dividend

    A distribution of a portion of a company's earnings, decided ...
  6. Target Payout Ratio

    A target payout ratio is a measure of what size a company's dividends ...
RELATED FAQS
  1. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  2. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  3. When does the holding period on a stock dividend start?

    The holding period on a stock dividend typically begins the day after it is purchased. Understanding the holding period is ... Read Full Answer >>
  4. What kind of companies in the utilities sector offer the most stable dividends for ...

    Among the companies that offer the most stable dividends for risk-averse investors are large, solidly established U.S.-based ... Read Full Answer >>
  5. What average annual total return does the utilities sector generate?

    Due to their highly stable earnings and cash flows, utilities companies are popular among investors interested in dividend ... Read Full Answer >>
  6. Why is the utilities sector popular among value investors?

    The utilities sector is popular among value investors due to the dividends paid by utility companies as well as the traditionally ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!