Dividend Fund Managers Are Buying Apple?

written by Hank Coleman

Apple's special media event, on March 7, 2012 Mutual fund managers are getting confused. It seems like more fund managers are deviating from their fund’s stated focus and suffering from style drift in order to own one of the hottest stocks of the past decade. More than 40 dividend funds have recently bought shares of Apple even though the company does not yet issue a dividend. Even mutual funds that focus on small companies have gotten into the act. Over 50 small capitalization and mid-cap mutual funds have bought shares of Apple stock even though the company’s ballooning share price has made it the largest company in the world. Is this new development a good trend? Or, is it something to worry about?

Signs Of Things To Come?

Many people have predicted that Apple will begin to offer a dividend to its shareholders this year. Do these dividend funds know something that the rest of the public does not? Or, are they simply anticipating the inevitable? Apple has almost $100 billion of cash on its balance sheet and very few options for the money. Shareholders and critics alike are clamoring for Apple to do something with its horde of cash whether it is through acquisitions, share buybacks, or issuing a dividend. With that being said, the prospects of a quarterly dividend in the immediate future for Apple is not necessarily a foregone conclusion though.

Should You Be Worried?

Is it the end of the world that dividend funds are purchasing shares of Apple before there is even a promise of a distribution to shareholders? No, it is not the worst thing to happen especially with the stock doing so well, but it definitely calls into question where these funds are headed in the future and what their limits are as to where they can go with our investments. For example, how much of your domestic stock fund can invest in foreign companies? Exactly what percentage of your global fund can hold stocks of companies that are right here at home? If dividend funds can purchase shares of companies who do not distribute profits to investors, where does it end? There is another danger, and investors risk losing diversity when fund managers drift from their fund’s stated style. Investors could find themselves quickly becoming overweight in Apple stock as more mutual funds across styles clamor to own its shares.

How To Protect Yourself

This latest episode of dividend funds, small cap mutual funds, and even one junk bond fund purchasing shares of Apple illustrate how little most of us know about what our funds are actually investing in. While we all receive the prospectuses of our mutual funds in the mail, how many of us actually read those large reports? Unfortunately, investing in mutual funds isn’t always as passive an investment as we would like for them to be. Granted, they do not require as much close attention as investing in individual stocks. But, investors would be mistaken to set their mutual fund investments on autopilot and not monitor them a little more closely. How many more examples, like buying shares of Apple, are out there lingering in the portfolios of our funds that we are not aware of?

Style drift in your mutual funds, where a fund manager diverges from the fund’s stated mission, can have serious consequences to investors. It is akin to breaking a promise with shareholders, and investors could be quickly surprised without realizing their mutual funds are diverging unless you stay on top of things.

Is it a big deal that dividend funds are investing in Apple before they even start issuing a dividend? Does it matter if the funds are earning a great return with capital appreciation? How close do you follow your mutual funds, their styles, and how much they drift?

15 thoughts on “Dividend Fund Managers Are Buying Apple?”

  1. Hank, your article is still very well done despite the cruel irony of its timing. Before I heard the announcement this morning, I was wondering the same thing about Apple. What does one do with $100B in cash? Make some horrible acquisitions or try to launch another lame service? The dividend seemed like it was coming, it was just a question of when. More importantly, your point about the fund managers straying from their core strategies and principles only highlights how little we really know about what OTHER PEOPLE are doing with our money.

    • Another issue that adds more fuel to the fire is that two thirds of the $100 billion are held overseas and can’t be returned to the US without severe tax penalties. The dividend and share buyback that Apple announed is technically so small relative to their amount of cash on the balance sheet and free cash flow they are generating. Apple will have another $10 billion in cash on its books this year, and the share buybacks are simply offsetting their employee stock options that would have deluted the shares outstanding if they didn’t buyback any. Apple could do more with their cash.

  2. It is unfortunate that mutual funds can for example name themselves one way and then behave in a different way. I guess that it just goes to show that it is buyer beware wrt mutual fund composition. Read the perspective very carefully and look for the clauses about managers discretion or statements about ability to alter the type of investments held. It turns out that even though this type of issue is more common with mutual funds it can also occur with ETF’s or more likely with the Index’s that the ETF’s track as I recently discovered with the S&P Canadian Dividend Aristocrats Index. It recently subtlely changed its criteria, announced the new constituents, then updated the criteria publicly and even still appears to have included companies which don,t meet the criteria fully.

    Anyway thanks for a great article. I think I will go out and buy some small cap funds to increase my Apple exposure. Not!

    • Dylan this isn’t the fault of the ETF (Claymore CDZ?). Standard and Poors changed the criteria for the Canadian Dividends Aristocrats Index this year. Claymore is simply following the index, so they would have had to sell some holdings and buy other holdings. some stocks were dropped and others were probably added. 😉

      Now changing the index from a 10 year to 5 year horizon for rasing dividends is where I do have an issue. I suppose there wouldn’t be many Canadian stocks left if they left at 10 years. Here is some more info on that:



  3. Why offer such a pitifually small dividend though? Isn’t a dividend of less that $3 on a share price of close to $600 more of a slap in the face than a reward to shareholders? Is it that necessary to Apple to join the ranks of dividend offering companies that they would be willing to do it with a dividen yield of <0.5%? I'm sure there are hundreds of things they balance in their calculations before arriving at a dividend price, but to the layman, what's the point?

  4. Ah, that’s the quarterly dividend, not yearly. I missed that part of the calculation. 😉 1.8%-ish is at least respectable. Thanks for the clarification Hank and Ninja!

  5. I could only see those with high incomes will be buying up shares of Apple because it’s just dam too expensive. It’s funny that you tell yourself that it won’t go past $300, $400, or $500 but it does. It seems like a okay investment for now and issuing a dividend will attract more potential investors.

    • I think it’s over-priced, every Pension Fund manager and their dog owns it. 😉 When a stock is hot it is the worst time to buy IMO. When everyone is chasing to get in, I feel that is the time to take profit and get out.

      Don’t get me wrong, Apple is a great company, I just don’t want to chase the high flyers…


    • MoneyCone – I don’t know if you can simply make a blanket statement like that. I think that a lot of it will depend on how / if they continue to increase their dividends and at what rate in the future their growth rate will be.

  6. Great point – I was going to add that: “Another issue that adds more fuel to the fire is that two thirds of the $100 billion are held overseas and can’t be returned to the US without severe tax penalties. The dividend and share buyback that Apple announed is technically so small relative to their amount of cash on the balance sheet and free cash flow they are generating.”

    These guys are making money hand-over-fist and when you think about it, it’s probably the only thing they could do. I think Apple is close to hitting it’s apex, and like Ninja say, when everyone is buying, that’s the time to avoid a company stock. You are chasing performance and what goes up….must come down.

    How many people remember that 15-some years ago, this was almost a penny stock?

    Time has certainly changed.

    Great post Hank, but I won’t be buying this guy 🙂

    Time to include this article in my Weekend Reading roundup!

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