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2013’s Best Dividend Stock: Apple Inc. (AAPL)?

Apple Inc. (NASDAQ:AAPL)‘s 2.3% dividend yield may seem small compared to other solid dividend stocks. But its less-significant payout doesn’t disqualify Apple Inc. (NASDAQ:AAPL) as a potential dividend play. In fact, looking beyond the yield reveals that Apple is potentially one of 2013’s best dividend stocks.

4 dividend stocks
To analyze Apple as a dividend stock, let’s compare it with four other stocks that make frequent appearances on “best dividend stocks” lists.

Apple Inc. (NASDAQ:AAPL)Solid income investments require three criteria:

1). A meaningful diviend yield.

2). An ability to generate significant free cash flow, or FCF.

3). A relatively low payout ratio.

Company Dividend Yield Payout Ratio FCF-to-Sales
Clorox (NYSE:CLX) 3.1% 58% 9.9%
Procter & Gamble (NYSE:PG) 2.9% 57% 12.8%
Coca-Cola (NYSE:KO) 2.7% 52% 15.8%
Apple Inc. (NASDAQ:AAPL) 2.3% 12% 28.1%

Source: Morningstar.

The Clorox Company (NYSE:CLX)

As a manufacturer and marketer of consumer products, competitive pressures abound in Clorox’s business environment. Even so, Clorox’ scale and brand equity earn the company superior returns on invested capital, enabling it to throw off considerable cash — about $0.10 of FCF for every dollar of sales, in fact.

The result is a nice 3.1% dividend yield and a conservative payout ratio of 58%. A payout ratio is the fraction of net income a company pays to its shareholders in dividends. The lower the ratio, the less likely it is that the company’s dividend would take a hit if its fundamentals turned awry. A payout ratio of 58%, therefore, leaves room for this cash cow to maintain a solid dividend going forward.

The Procter & Gamble Company (NYSE:PG)
Amid intense competition and a sluggish global economic environment, Procter & Gamble is struggling with slowing revenue and an overextended expansion. But that doesn’t stop the company from throwing off cash. Over the trailing 12 months, the company has generated nearly $0.13 of FCF per dollar of sales. In fact, during the last three years alone, P&G has generated more than $36 billion in free cash flow.

At today’s price, Procter & Gamble’s dividend yields 2.9%. It has a conservative payout ratio of 57%.

The Coca-Cola Company (NYSE:KO)
Diversification, extensive distribution, and powerhouse brands — Coca-Cola has it all. The company’s powerful position as a global leader in consumer beverages results in an extraordinarily consistent ability to produce generous amounts of FCF for shareholders. In fact, over the last 10 years, the company’s FCF-to-sales ratio only dipped below 15% once.

Coca-Cola has a meaningful dividend yield of 2.7% and a conservative payout ratio of 52%.

Apple Inc. (NASDAQ:AAPL)
Apple Inc. (NASDAQ:AAPL)’s products carry significant brand equity, evident in the company’s trailing-12-month gross margin of 42% — the envy of the industry. The result is a FCF-to-sales ratio of 28.1%, far higher than any of the three companies listed above. Though some tech companies like Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) have significant FCF-to-sales ratios as well — 37.8% and 26.6%, respectively — that’s because their revenue comes from software and/or services, which have higher margins. Apple Inc. (NASDAQ:AAPL) stands alone as the world’s most profitable consumer electronics company.

Yes, Apple’s dividend yield of 2.3% is lower than all three of the companies mentioned above. But its extremely conservative payout ratio of just 12%, combined with its ability to throw off cash, means that Apple’s dividend could grow significantly in the future.

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