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A worker walks in front of the Apple Inc. headquarters in Cupertino, Calif. (PAUL SAKUMA/AP)
A worker walks in front of the Apple Inc. headquarters in Cupertino, Calif. (PAUL SAKUMA/AP)

Hoping for an Apple dividend rise? You may regret it Add to ...

There is a lot of pressure on Apple Inc. to boost its dividend, but you have to wonder if a bigger payout sends the wrong signal about the company’s future.

Just about everyone is expecting Apple to make an announcement soon, given the attention the company’s enormous $137-billion (U.S.) cash pile is attracting.

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One shareholder, David Einhorn of Greenlight Capital, has been particularly vocal about the cash level, even threatening legal action at one point earlier this year. He argues that the best approach is to create perpetual preferred shares as a vehicle for distributing cash.

However, analysts believe that a dividend increase is the more likely approach, especially with Apple chief executive officer Tim Cook appearing dividend-friendly. He reinstated the company’s dividend a year ago, following a 17-year absence, with a quarterly payout of $2.65 a share.

According to Bloomberg News, analysts believe Apple is poised to boost that payout by more than 50 per cent, to $4.14 a share, for an annual distribution of $15.7-billion – which is roughly what the company is expected to accumulate this year through its U.S. operations.

The higher dividend would give the stock a yield of 3.7 per cent, and put it in the upper echelons of dividend payers within the S&P 500.

That sounds good at first: On average, dividends account for about half of total of stock market returns over the long term. And dividends can attract a new group of long-term investors who love those regular cheques.

But technology stocks and dividends have an awkward relationship because dividends often signal that a company’s best days of growth and innovation are over. While that’s not a problem for real estate companies, banks and utilities, it can be the kiss of death for a sector that must continuously innovate – a sector in which Apple certainly belongs.

If you look at some of the top-yielding U.S. technology stocks, you will discover that an attractive yield goes hand-in-hand with a stagnant share price.

Microsoft Corp., Intel Corp., Dell Inc., Cisco Systems Inc., Hewlett-Packard Co., CA Inc. and Cypress Semiconductor Corp. have dividend yields of 2 per cent or more. Yet, their share price performances over the past five years have been abysmal, making dividends look more like a trap than a benefit.

In the case of Microsoft, it began returning cash to shareholders about 10 years ago. Since then, its share price has underperformed the S&P 500 by 26 percentage points when you factor in dividends.

Late last year, Bloomberg News looked at the performances of technology companies that paid regular dividends, and discovered that Microsoft wasn’t an isolated case.

Technology companies that either initiated dividends or raised them in 2012 saw their shares rise an average of just 1.3 per cent since the announcements were made, as of September, compared to gains of 15 per cent for companies that didn’t increase their payouts.

Intel stood out as an ugly example: It raised its dividend three times over the previous 18 months, with the most recent boost announced last May. But its share price has slumped 23 per cent since then.

In the case of Apple, a $4 quarterly dividend will silence many critics of the company’s overly conservative view on cash.

But will it reverse the $300-billion in lost market capitalization that has followed the 37-per-cent slide in the share price and concerns that it has lost its technological and marketing edge?

If history is any guide, the dividend will merely confirm that Apple’s best days are behind it.

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