2 growth stocks to buy for passive income in 2023

With P/E ratios above 20 and dividend yields below 1%, why does Stephen Wright see growth stocks like Apple and Visa as income stocks?

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Neither Apple (NASDAQ:AAPL) nor Visa (NYSE:V) jumps out immediately as a stock for dividend investors to take note of. They both look like obvious examples of growth stocks.

First of all, neither stock has a particularly eye-catching dividend. Apple’s dividend yield is 0.62% and Visa’s is 0.83%.

Moreover, both stocks trade at high price-to-earnings (P/E) ratios. Apple shares trade at a P/E of 24 and the Visa share price represents a 31 P/E ratio. 

A low dividend yield and a high P/E ratio make both companies look like growth stocks, rather than income stocks. And I don’t dispute that either business has good growth potential.

I think there’s more to these stocks than meets the eye, though. As I see it, both are attractive from a passive income perspective, too.

Share buybacks

Repurchasing shares involves a company using its cash to buy its own shares and then retire them. As a result, the company’s share count comes down.

According to Warren Buffett, this is one of the most effective ways for a company to increase the value of its shares. But it also allows investors to generate passive income by selling their shares.

Suppose I own a 7% stake in a company that buys back 10% of its shares. This means I can sell 10% of my investment for cash while retaining 7% ownership of the overall business.

Share buybacks are therefore a way for investors like me to earn passive income. And I think that this is significant for growth stocks like Apple and Visa.

Apple and Visa

Both Apple and Visa spend much more on share buybacks than on dividends. As a result, just focusing on the dividend misses a lot of the returns available to shareholders.

Over the last 12 months, Apple paid out $14.8bn on dividends. But it also spent $89.4bn on share buybacks. 

Visa also returned much more cash through buybacks than via dividends. The company returned $3.2bn via dividends, but spent $11.6bn on repurchasing its stock.

Factoring this into a passive income calculation makes a huge difference in the case of both companies. Their initially unremarkable dividends start to look much more attractive.

Apple returned six times as much via buybacks than through dividends. As a result, the total distributed by the company to its shareholders amounts to a return of 4.37%.

Visa’s share buybacks were three times higher than its dividend payment. That means that its distributed cash provided investors with a 3.84% passive income return.

Growth stocks

There’s no doubt that both Apple and Visa are growth stocks. Since 2017, earnings per share have grown annually by an average of  21.5% at Apple and 20% at Visa.

Both are worth considering from a passive income perspective, though. While neither has a significant dividend yield, both use substantial share buybacks to boost shareholder returns.

At today’s prices, I prefer Apple to Visa. While neither stock is risk-free with a recession on the horizon, I’m keeping an eye on both in 2023.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Apple. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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