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Apple's annual dividend decision looms for Wall Street, and America

With Apple set to report second-quarter profits Tuesday, it's only a little bit of an exaggeration to say all of Wall Street's about to get a little bit of a raise.

That's because the spring is when Apple typically announces its annual dividend hike. After a 24 percent jump in Apple shares this year, their yield is just about 1.6 percent, well below its peak and even below the yield of the Standard & Poor's 500 and its corresponding ETFs like IVV and SPY which yield roughly 1.9 percent.

And that matters, even to people who don't directly own Apple shares, because the world's most-valuable company —that is sitting on a stockpile of cash that has topped $250 billion — is a core holding of both index mutual funds and the inexpensive exchange-traded funds held by more than 5 million U.S. households, according to the Investment Company Institute.

Tim Cook
Andrew Burton | Getty Images
Tim Cook

"This is normally the quarter when they talk about (dividends and stock buybacks) and we expect it to be the focus,'' said CFRA Research analyst Angelo Zino. "No one will really care about the iPhone results ahead of a massive launch of the iPhone 8 [in September]."

Everybody has a stake in Apple this year in particular, since the stock's recent run to as high as $145 from about $92 last June has been driving indexes and index funds.

"This is normally the quarter when they talk about (dividends and stock buybacks) and we expect it to be the focus.  No one will really care about the iPhone results ahead of a massive launch of the iPhone 8 [in September]." -Angelo Zino, CFRA Research analyst

One measure of Apple's recent importance: It accounts for almost 30 percent of the gain in the Dow Jones Industrial Average since it hit 20,000.The next-most important stock in the 6 percent-plus rise for Dow ETFs this year — DIA and IYY — has been airplane giant Boeing.

In the world of ETFs, Apple shares loom large. Apple is roughly 15 percent of the S&P 500 Technology Index ETF (XLK) and 17 percent of the $3.3 billion iShares U.S. Technology Fund (IYW). Apple is 3.66 percent of the S&P 500 ETF, according to Morningstar.

Top annual dividend payers

  1. Exxon Mobil: $12.440 billion
  2. Microsoft: $12.055 billion
  3. AT&T: $12.037 billion
  4. Apple: $11.962 billion
  5. Verizon: $9.416 billion

(Source: S&P Dow Jones Indices)

The dividend announcement is likely to accompany an expansion of Apple's stock buybacks, perhaps by as much as $45 billion to $50 billion, according to an estimate done by Goldman Sachs analyst Simona Jankowski. Its not a shareholder reward program Apple tends to divulge details on until later in the year, but CFRA analyst Zino suggested that may change if details President Trump's plans to allow low-tax repatriation of offshore corporate cash holdings become clear — it was not presented with any detail in the tax reform overview provided by the White House last week.

Apple CEO Tim Cook has said the company has allocated several billion dollars of its offshore holdings for buybacks as soon as the company can move the money into the U.S. without paying U.S. corporate taxes on it. Most market watchers, noting that as much as three-fourths of cash repatriated during a tax holiday on foreign profits while George W. Bush was president — even though it was technically prohibited by Congress — expect Apple to pay out much more.

"They could reduce the share count another 20 percent if they get the repatriation effect," Zino said.

Apple could use its massive cash hoard to buy Netflix and Tesla, and still have plenty of cash left over, noted a Wall Street Journal report on Monday that estimated the cash at $250 billion. Some market watchers speculate that Apple could also offer a special dividend payment if repatriation of cash occurs.

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The company has been returning capital to holders of shares since 2012, when it instituted a buyback and dividend in response to pressure from activist investor Carl Icahn. Apple's initial dividend was the largest "dividend increase" in the S&P 500 ever, according to S&P Global Market Intelligence data. About 94 percent of its $246 million in cash and securities is held overseas, as the company uses most domestic profits for reinvestment and return to shareholders, supplemented by money the company has borrowed for buybacks.

Top dividend ETFs of 2017

  1. First Trust Nasdaq Rising Dividend Achievers (RDVY): 9.78 percent
  2. Vanguard Dividend Appreciation (VIG): 8.36 percent
  3. ProShares S&P 500 Aristocrats (NOBL): 6.67 percent
  4. PowerShares Dividend Achievers (PFM): 5.08 percent

Apple raised its quarterly dividend, currently 57 cents, by a nickel each of the past two years, while buybacks have reduced Apple's shares outstanding by almost 20 percent, worth about $150 billion at today's share price. The amount Apple spends on dividends, about $12 billion last fiscal year, has been nearly unchanged because the higher payout is offset by the shrinking number of shares, Zino said.

The company's yield since 2012 has fluctuated between about its current level and about 2.4 percent, fluctuating with Apple's stock price. In February, RBC Capital analyst Amit Daryanani suggested the company could afford to boost its payout to 4 percent, though Zino considers such a sharp move unlikely, and Apple has played it safe with dividend raises in recent history rather than meet more aggressive wishes from Wall Street and investors.

Dave Nadig, CEO of ETF.com, said investors interested in Apple as a dividend play still have to come back to an obvious fact: "The way to play Apple (or any other company) isn't with an ETF, it's with the stock," Nadig said. "Of course, if you are trying to participate in the broad market you want some exposure to Apple. That's the beauty of a cap-weighted index. If you own a total market ETF your exposure to Apple is exactly as important as the entire stock market has decided it is."

Another modest boost wouldn't goose shares of Apple, or the funds that hold its stock, much higher in the near term. But a higher payout would buttress the foundation for longer-term returns for Apple's owners.

By Tim Mullaney, special to CNBC.com

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