Apple Inc will start paying a regular quarterly dividend of $2.65 a share in July and buy back up to $10 billion of its stock beginning in the next fiscal year, the world's most valuable company said on Monday.

The company expects the share buyback program to run over three years, with the primary objective to offset the impact of employee stock options and equity grants.

Apple's annual dividend yield will come in around 1.8 percent. That is slightly lower than the average of 2 percent for companies in the Standard & Poor's 500 index.

We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure, Apple Chief Executive Office Tim Cook said in a statement. You'll see more of all of these in the future.

The company will still maintain a war chest for other strategic opportunities, Cook said. These decisions will not close any doors for us.

He told analysts on a conference call that product innovation remained the company's priority.

The maker of the iPhone, iPad and iPod has $98 billion in cash and securities, equal to about $104 a share, according to ISI Group analyst Brian Marshall.

The company said it anticipated using about $45 billion of domestic cash in the first three years of its buyback and dividend programs.

When asked about Apple's substantial cash parked overseas, Chief Financial Official Peter Oppenheimer said the company had no plans to repatriate it at this time.

We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have, he said. That's our view. And we've expressed it.

Apple last paid a dividend in 1995, according to Thomson Reuters data. In 1996, the company posted a net loss of $816 million. Apple is an overcapitalized company, and it's probably better to have the cash in the shareholders' pockets than in Apple's pockets, said John Strand, CEO of Copenhagen-based Strand Consulting.

Apple shares were up 1.7 percent at $595.84 on Nasdaq after being halted earlier in the morning.

For a lot of people who own this stock, said BGC Partners analyst Colin Gillis, some dividend is better than no dividend.

(Reporting by Yinka Adegoke in New York and Poornima Gupta in San Francisco; Additional reporting by Tarmo Virki in Helsinki and Sinead Carew in New York; Editing by John Wallace and Lisa Von Ahn)