Many dividend-seeking investors gravitate to certain stocks because of their yields. The smarter play, however, is to concentrate on buying and holding stocks that have a history of growing their payouts. Stocks in that category have a history of producing higher returns than companies that strive to maintain outsized payouts.
The data is eye-opening. Over the last 50 years, dividend growers and initiators have delivered total annual returns averaging 10.7% -- higher than the S&P 500's 8.2% average annual total return -- according to data by Ned Davis Research and Hartford Funds. For comparison, companies that maintained their dividends only produced average annual total returns of 7.1%.
Tech giants Apple (AAPL -0.57%) and Broadcom (AVGO -1.84%) both have long histories of dividend growth. And with more payout increases likely down the road, they're smart buys for dividend investors as we start the year.
A cash flow machine
Some income-focused investors may dismiss Apple's stock given its paltry payout. Its current dividend yield of 0.7% is lower than the S&P 500's 1.7% yield.
However, what Apple's dividend lacks in size, it more than makes up for in growth. The tech giant has increased its payout every year since it re-instituted its dividend in 2012, and has increased its annual payouts by 143% since then. Those growing payouts have helped drive market-crushing annualized total returns for Apple of nearly 21%, significantly outpacing the 13.2% average annual total returns of the S&P 500.
Despite its mammoth size, Apple continues to grow at a healthy rate. It delivered another record-breaking quarter last period, with its revenue expanding by 8%. Meanwhile, its operating cash flow increased by $18 billion to more than $122 billion. That gave the company more money to invest in developing products and services, and more to return to shareholders via dividends and share repurchases. Between those two, Apple sent investors more than $29 billion last quarter, including about $3.7 billion in dividends.
Even with those outlays, it maintained a robust balance sheet with nearly $170 billion of cash and marketable securities. With its current dividend payment consuming only a small percentage of its cash flow, Apple has plenty of room to grow its payout.
Accelerating its software growth
Broadcom holds a more obvious appeal for income investors given its relatively attractive yield of 3.2%. That above-average payout is due to the company's strong cash flows and its dividend payout policy. The company converted 49% of its revenue into free cash flow in its fiscal 2022, which ended Oct. 30. Meanwhile, it set a policy to pay 50% of its prior fiscal year's free cash flow to shareholders via the dividend. It uses the other half to invest in growth and to repurchase shares. As it has been generating strong and growing free cash flow, Broadcom has steadily increased its dividend.
The semiconductor and infrastructure software solutions company increased its dividend by 12% for its fiscal 2023. That marked Broadcom's 12th straight year of increasing its payout since it initiated a dividend in its fiscal 2011. The company has increased its payout by a jaw-dropping 5,650% since that first payment. That has helped power it to a market-obliterating average annual total return of 31.3%, compared to 12.2% for the S&P 500.
Broadcom should be able to continue growing its dividend. A big driver of its earnings is its burgeoning software business. The company is working to accelerate its software capabilities by acquiring VMware in a $61 billion cash-and-stock deal. That deal should provide new growth opportunities, helping Broadcom to continue expanding its free cash flow and dividends.
Consider the total picture
It can be easy for income-focused investors to be drawn to the allure of high current dividend yields. However, the wiser investments can be those companies that are well-positioned (and well-inclined) to grow their payouts, because those companies have historically produced higher total returns for their shareholders. That has certainly been the case for Apple and Broadcom since they started paying dividends more than a decade ago. With more dividend growth ahead, these tech giants look like smart dividend stocks to buy this year.
