A dividend yield of 0.5% might not jump out at investors looking for passive income. But I think there’s more to Apple (NASDAQ:AAPL) shares than it might seem at first.
Warren Buffett is a big fan and it’s not hard to see why – the company has strong margins, loyal customers and impressive growth. For passive income though, Apple’s strength is in its finances.
Share buybacks
Apple spends a significant amount of the cash it generates on share buybacks. This is one of the reasons that Buffett loves the stock so much.
Over the last decade, the company has spent around $573bn on repurchasing its own shares. As a result, the total shares outstanding has fallen by around 4.5% each year.
This is significant for two reasons. It helps accelerate growth and it provides shareholders with a source of passive income.
For example, Berkshire Hathaway owns around 6% of Apple’s outstanding shares. When Apple buys back its shares, this gives Berkshire two options.
Building wealth
The first is to build wealth. As Apple cuts its number of shares outstanding, the value of each remaining share increases.
Over the last decade, Apple has grown its operating income by 8% a year. But its lower share count means annual growth in earnings per share has come in at 15%.
As a result, each Apple share corresponds to $5.89 today, compared to $1.42 in 2013. This causes the value of the stock to rise.
Berkshire has held its stake in Apple for a number of years. And the fact that the company has repurchased its shares is part of why the investment has performed so well for Buffett.
Passive income
Share buybacks aren’t just good for building wealth though. They are also a valuable source of passive income.
Cutting the company’s share count allows investors looking for passive income to sell part of their investment without reducing their stake in the company. This is important.
Berkshire’s stake in Apple, for example, at today’s prices has a market value of around $151bn.
Apple’s share buybacks allow Berkshire to sell 4.5% of its stake each year and still own the aforementioned 6% of the overall company at the end of the year. The cash it gets from selling is a source of passive income.
A stock to buy
Adding a 4.5% return from share buybacks to a 0.5% dividend gives a 5% annual return for income investors. For a company as strong as Apple, I see that as an attractive proposition.
One risk to be aware of here is Apple’s high share price. If the stock keeps going up, returns might be lower as it becomes more expensive for the company to repurchase its shares.
Overall though, I think Apple’s strong cash generation makes it a good investment from a passive income perspective. Buffett rates the stock highly and so do I.
