The Most Promising Dividends in Rebounding Chip Stocks

Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the integrated circuit industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  • The current yield
  • The dividend growth
  • The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business' expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into integrated circuits
It's not good to focus on dividend yield alone. For example, Micrel (Nasdaq: MCRL  ) recently yielded 1.5%, while Broadcom (Nasdaq: BRCM  ) offered just 1.1%. But Micrel has been raising its dividend by an annual average of nearly 6% over the past five years, while Broadcom has upped its payout by 25% over the past two years. Factoring in growth, Broadcom looks at least as attractive, since its yield is on track to surpass Micrel's soon at current rates. Broadcom is facing competition from Qualcomm in Wi-Fi chips, though.

Some integrated-circuit companies, such as Skyworks Solutions (Nasdaq: SWKS  ) and TriQuint Semiconductor (Nasdaq: TQNT  ) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Both of these companies make components for Apple devices, which bodes well for their growth, though some are worried about shrinking margins at TriQuint. Skyworks, meanwhile, has been pleasing investors by grabbing more business from Samsung.

Just right
As I see it, Analog Devices and Taiwan Semiconductor (NYSE: TSM  ) offer the best combination of dividend traits, sporting some solid income now and a good chance of solid dividend growth in the future. Respectively, they recently yielded 3.1% and 2.6%. Analog recently hiked its yield by 20% and though it hasn't been on fire lately, management expectations are promising. Taiwan Semiconductor has been ramping up its revenue growth, making a range of chips for other companies and dominating its peers. The company is bullish on its future, planning to invest nearly $12 billion in new production capacity over the coming years. Some expect it to soon be supplying more chips for Apple, which could boost its top line considerably.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry. Remember, too, that you may find even more attractive dividends elsewhere, such as in foreign wireless companies or gas utilities.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

Looking for some All-Star dividend-paying stocks? Look no further.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and QUALCOMM, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of QUALCOMM, TriQuint Semiconductor, and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2012, at 12:54 PM, wrsine wrote:

    I'm tired of hearing how TQNT has shrinking margins - their margins are still around 30% - it hasn't gone to zero. The big problem is that AAPL really puts the screws to their suppliers and dictates how much each supplier is allowed to make - talk about a company that bullies - kinda of like Microsoft. As far as TQNT sell more to Samsung - maybe it's true but they sell to all cell phone makers including Nokia which still has half the world's market share. So this constant busting of TQNT is unjustified.

  • Report this Comment On May 05, 2012, at 12:54 PM, wrsine wrote:

    and unnecessay.

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