A popular method of investing is what is commonly known as dividend growth investing, or DGI for short. In a nutshell, a dividend growth investor looks to invest in stocks that pay significant dividends and can both sustain those dividends and grow them for the foreseeable future.
One stock that every dividend growth investor should consider for his or her portfolio is Apple (AAPL -2.41%), as it ticks all the right boxes.
Image source: Apple.
Apple's dividend is large and sustainable
As of this writing, Apple pays a dividend of $2.92 per share, which works out to a yield of around 1.56%. This isn't the highest you'll find among potential dividend growth stock candidates, nor is it even close to the highest-yielding tech stock out there, but it's a respectable payout.
Perhaps more importantly, though, Apple's dividend is sustainable. Generally speaking, dividend payments come out of a company's free cash flow. So, to try to understand how sustainable a dividend is, we need to look at how much free cash flow per share it generates and compare that to the amount it pays out in dividends.
The smaller the percentage of free cash flow the company's dividend is, the more sustainable it is (since the dividend is more likely to be maintained even during a significant business downturn).
AAPL free cash flow per share (TTM). Data by YCharts.
Apple's current dividend payout represents just 28% of the company's overall free cash flow per share, suggesting that its dividend is well below what it could potentially pay out to stockholders if it wanted to.
Dividend growth capacity
Since Apple pays out just 28% of its free cash flow per share in the form of a dividend, it could increase its dividend -- and do so quite substantially -- by simply choosing to allocate more of its free cash flow to the dividend.
While I think this is a possibility, Apple seems to prioritize share repurchases because management thinks the stock is undervalued, so don't think that Apple will dramatically increase the percentage of free cash flow that it allocates to the dividend anytime soon.
The good news, though, is that Apple's free cash flow per share trend has been up over the last 10 years (with some lumpiness here and there), and if you believe that the company has significant growth potential left, then you'd have reason to believe that the company's overall free cash flow (and therefore free cash flow per share) will go up as well, leading to further dividend increases.
Another thing to consider is that Apple has been aggressively repurchasing stock and even announced that its board of directors had authorized yet another share repurchase program good for $100 billion worth of the stock. Share repurchases have the nice effect of increasing free cash flow per share because the share count comes down. Higher free cash flow per share should ultimately translate into a fatter dividend for stockholders.
AAPL average diluted shares outstanding (annual). Data by YCharts
So, with the combination of potentially increasing free cash flow, a shrinking share count, and room for Apple to funnel more of its free cash flow per share to the dividend, dividend growth investors should find plenty to like here.
