Last week’s column focused on selling Apple (AAPL), an action I wholeheartedly recommended a year ago and which I continue to recommend for growth-oriented investors. I think Apple has more potential downside than upside from here, given that most potential owners are already invested in the stock, and there are therefore more potential sellers than buyers.
However, I did not address the question of the AAPL dividend.
Luckily, one reader hit the nail on the head with the following letter.
I purchased 200 shares of Apple back in 1993 at the price of $28.50 per share. Now due to splits I have 5,600 shares of the stock which really pays me a very nice dividend, approx. $13,000 a year. This is really nice income for a retired guy like myself, and I personally think that Apple will offer more dividend increases in the future. This means I have an average cost of around $1 per share. I am 64 years old and can’t/don’t want to look for anything else at this stage in my life. I also don’t really want to pay the Capital Gains taxes. Do you think I am being a pig/stupid?
I told John I would answer his letter here, so that all my readers could see the thought process behind this difficult question.
The first thing I did was look at a long-term chart of Apple, to refresh my memory about when John bought and what he’s held through.
Note that 10 years after he bought, John still had no profit! He was certainly a patient investor. But 10 years after that, he was a very happy camper!
The second thing I did—mainly to satisfy my curiosity—was calculate the compound annual growth rate of John’s investment in AAPL over his 23 years of holding. The answer is a very impressive 22%.
Chloe Lutts Jensen Weighs In
And the third thing I did was send John’s letter to my daughter, Chloe Lutts Jensen, who’s Cabot’s dividend stock expert.
Chloe’s answer was:
“Wow, good for him!
“In my mind, the question is whether it’s worth selling AAPL—and paying the capital gains tax—now to try to find something generating the same or higher annual income (on the smaller post-tax amount) with better growth potential and/or less downside risk. Given the paucity of reasonably valued stocks yielding over 2.5% today, I doubt it would be worth it, especially since the AAPL dividend has good growth potential—dividends are still not a high priority for the company, but will likely become more important as it continues to mature and earnings growth slows (EPS growth is expected to average in the high single digits over the next five years). Apple’s payout ratio is still less than 25%, which is closer to the ratios you see at companies still focused on growth.
“But maybe I’m underestimating the potential for downside by thinking about AAPL as more of a MSFT or IBM, and not as a stock that’s risen 1,000% in the past 10 years.
“For the record, the AAPL dividend gets a rating of 6.8 for Dividend Safety and a 5.5 for Dividend Growth.”
Chloe’s points are all good, and I’ll add a few of my own.
1. Diversification is an important principle of investing. John doesn’t tell us how much of his portfolio is in AAPL, but if he is too concentrated in this one stock, diversifying further could be wise.
2. Remember EMC, Prime Computer, Digital Equipment, Wang, Dell and Blackberry? Each one of these companies sat on top of the computing world once, and there was no way to see how they could fail. But they did. And Apple might well do the same. The world of technology is not only ever-evolving, it’s extremely hard to stay on top of—and it’s easy to die. For example, Apple gets 57% of its revenue from iPhones now, and the world is full of competitors working to eat into that profitable business.
3. I’m on record as projecting that if AAPL follows the pattern of IBM and MSFT, its stock will eventually bottom around 34. My confidence level is roughly 50%. If that correction happens, selling and paying taxes now would be wiser than seeing value disappear.
4. On the positive side, investors have been leaning toward dividend-paying companies recently as low interest rates have made the bond market unrewarding. I agree with Chloe that the AAPL dividend is almost certain to increase as the company’s growth slows, and that should help retain investors (like John) who are growing fonder of dividends than growth.
5. Back on the personal side again, if John holds the appreciated stock in his estate, his heir(s) will acquire that stock with a stepped up cost basis established on the date of death—thereby avoiding the taxman. (But I’m not a retirement planner and I don’t know Illinois law—and laws can change.)
In conclusion, there are a lot of considerations here. Most likely, there is no one perfect answer. In fact, I don’t believe there can be without knowing the future of AAPL.
Thus my final suggestion to John is to sell just a little AAPL now (maybe 5%) and place the proceeds in a couple of high-quality companies where the dividends are equally high and safer than the AAPL dividend—he can find good candidates in Cabot Dividend Investor (details here). Then, roughly a year later, evaluate those actions. If the results seem good, repeat.
Lastly, to answer John’s final question, he is clearly not a pig or stupid. So far, he’s been pretty darn smart.
Nintendo (NTDOY) and Pokemon Go
Two weeks ago, as Pokemon Go was sweeping the world faster than any previous mass market movement—and after I’d downloaded the game and tried it—I wrote, “I am very excited about the future of augmented reality in general, and if other people are also excited, that may not only validate Nintendo’s (NTDOY) recent strength but also justify an initial investment in the days ahead, especially if you can get in near the bottom of this correction.
“Where might this correction bottom?” I wrote.
“Well, I have two educated guesses. Guess one says that the stock may give back half of its original advance, which would take it down to 28. Guess two says that the stock may decline to a level of support, which could be as low as 26. Anywhere between those two prices might be a sensible entry point.”
Today, it’s clear—after a brief visit to 25—that 26 has become the support level. I like the way volume in the stock has dried up, as the initial buying wave has faded. There are no motivated sellers of the stock now. Furthermore, given that NTDOY declined from a high of 78 in 2007 to a low of 11 in early 2013, there is no “hot air” in this stock. It has been hibernating for quite some time, and is now primed to awaken and begin a new major uptrend.
Granted, no one can say exactly how Nintendo will work to capitalize on its runaway success, but it’s clear that the public loves Pokemon (again) and that augmented reality via a smartphone that you already own is a far more palatable (not to mention affordable) experience than augmented reality via a bulky headset.
Furthermore, there’s no question that management at Nintendo is working extremely hard to develop ways to further monetize the Pokemon Go app, while finding new ways to capitalize on the resurgence of popularity of Pokemon in general.
I recommend taking a pilot position here, but only if you’ve got a high tolerance for volatility. Trouble is, I might not write about Nintendo for quite some time! So what you really should do, if you like jumping on hot stocks, is become a regular reader of Mike Cintolo’s Cabot Top Ten Trader.
Just last week, several of Mike’s recommendations gapped up on excellent earnings reports (take a look at Parsley Energy—PE), so his readers are not only making money, they also have the comfort of knowing that Mike will tell them when to sell!