Neither Apple (NASDAQ:AAPL) nor Visa (NYSE:V) jumps out immediately as a stock for dividend investors to take note of. They both look like obvious examples of growth stocks.
First of all, neither stock has a particularly eye-catching dividend. Apple’s dividend yield is 0.62% and Visa’s is 0.83%.
Moreover, both stocks trade at high price-to-earnings (P/E) ratios. Apple shares trade at a P/E of 24 and the Visa share price represents a 31 P/E ratio.
A low dividend yield and a high P/E ratio make both companies look like growth stocks, rather than income stocks. And I don’t dispute that either business has good growth potential.
I think there’s more to these stocks than meets the eye, though. As I see it, both are attractive from a passive income perspective, too.
Share buybacks
Repurchasing shares involves a company using its cash to buy its own shares and then retire them. As a result, the company’s share count comes down.
According to Warren Buffett, this is one of the most effective ways for a company to increase the value of its shares. But it also allows investors to generate passive income by selling their shares.
Suppose I own a 7% stake in a company that buys back 10% of its shares. This means I can sell 10% of my investment for cash while retaining 7% ownership of the overall business.
Share buybacks are therefore a way for investors like me to earn passive income. And I think that this is significant for growth stocks like Apple and Visa.
Apple and Visa
Both Apple and Visa spend much more on share buybacks than on dividends. As a result, just focusing on the dividend misses a lot of the returns available to shareholders.
Over the last 12 months, Apple paid out $14.8bn on dividends. But it also spent $89.4bn on share buybacks.
Visa also returned much more cash through buybacks than via dividends. The company returned $3.2bn via dividends, but spent $11.6bn on repurchasing its stock.
Factoring this into a passive income calculation makes a huge difference in the case of both companies. Their initially unremarkable dividends start to look much more attractive.
Apple returned six times as much via buybacks than through dividends. As a result, the total distributed by the company to its shareholders amounts to a return of 4.37%.
Visa’s share buybacks were three times higher than its dividend payment. That means that its distributed cash provided investors with a 3.84% passive income return.
Growth stocks
There’s no doubt that both Apple and Visa are growth stocks. Since 2017, earnings per share have grown annually by an average of 21.5% at Apple and 20% at Visa.
Both are worth considering from a passive income perspective, though. While neither has a significant dividend yield, both use substantial share buybacks to boost shareholder returns.
At today’s prices, I prefer Apple to Visa. While neither stock is risk-free with a recession on the horizon, I’m keeping an eye on both in 2023.
