Why Buying This FAANG Stock Could Be a Genius Move

FAANG stocks remain popular among investors because these tech giants have historically outperformed the market. Over the past decade, the stocks of (Facebook) Meta PlatformsApple (NASDAQ: AAPL)AmazonNetflix, and (Google) Alphabet have all beaten the S&P 500. 

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FAANG Stock

Stock Price Gain

Average annual increase

Apple

616%

25%

Netflix

532.8%

23.2%

Amazon.com

452.8%

21.4%

Alphabet

256.5%

15.5%

Meta Platforms

117.4%

9.2%

S&P 500

113.9%

9%

Data source: Ycharts.

Apple has led the way. In fact, the tech titan has also outperformed its FAANG stock peers over the last three- and five-year periods.

While it’s likely not the only catalyst, Apple is the only FAANG stock that pays dividends. That’s worth noting because dividend-paying stocks have historically outperformed their stingier peers. 

Here’s why Apple’s decision to pay a growing dividend makes the company look like the smartest FAANG stock to buy.

The secret to Apple’s success?

Dividend payments have historically been an important contributor to shareholder returns. Since 1930, 40% of the S&P 500’s total return has come from dividend income, according to data by Morningstar and Hartford Funds. Meanwhile, over the last 50 years, dividend-paying stocks have outperformed the broader market (9.6% average annual total return vs. 8.2% for the S&P 500). They have also vastly outperformed non-payers (4.8% total return). Of note, companies that have initiated dividends or consistently increased them have produced even higher total returns of 10.7%.

Apple got back into the dividend-paying game in 2012 by reinitiating a dividend following a 20-year layoff. The company has increased its shareholder payout every year since then: 

 


AAPL Dividend


© YCharts
AAPL Dividend


Given the power of a growing dividend, it has contributed to some of Apple’s relative outperformance during the last decade.

Plenty of room to continue growing the dividend

Apple should be able to continue growing its dividend in the future. The company produces a massive amount of cash flow each year, giving it the funds to reinvest in growing its business and return to shareholders. The company produced a prodigious $122.2 billion of cash generated by operating activities in 2022, up $18 billion, or 17.4%, from 2021. It spent about $11 billion on business-related investments and returned $104 billion to shareholders through repurchases and dividend payments. 

The dividend only consumed $14.8 billion of its cash last year, which was 2.6% more than it paid in 2021. However, the per-share payment rose by 4.5% — from $0.22 per quarter to $0.23 per quarter — showcasing the positive impact of its meaningful share repurchase program

Apple’s combination of growing cash flow, a falling share count, and a low payout ratio put it in an excellent position to continue increasing its dividend in the future. The company also has a cash-rich balance sheet, further enhancing its financial flexibility. While it will be tough for the company to repeat its monster outperformance from last decade — especially considering its mammoth size — Apple’s rising dividend payments position it to continue producing market-beating total returns. 

The smartest FAANG stock

Companies have de-emphasized dividends over the years because investors prefer stock price appreciation. That has many companies, especially in the tech sector, choosing to allocate all their cash flow toward growing their businesses and repurchasing shares in hopes of delivering outsized stock price gains.

However, dividend-paying stocks have historically produced higher total returns, especially companies that consistently grow their payouts. Apple has chosen the wiser path of paying a growing dividend. It could enable the tech behemoth to continue producing market-beating total returns, making it look like the smartest FAANG stock to buy.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Matthew DiLallo has positions in Alphabet, Amazon.com, Apple, Meta Platforms, and Netflix and has the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

 

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