Is Intel Still a Solid Bet for Income Investors?

Intel (NASDAQ: INTC  ) stock is up over 10% in the past month with the help of a solid second quarter. For income investors who already owned Intel, this is good news. But for the income investor who had not yet bought shares, it's time to re-evaluate whether Intel is still an enticing investment for investors looking to grow their dividend income. After all, when a stock jumps, its dividend yield falls.

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The cons
Measured by yield alone, especially after the stock's recent run-up, Intel stock doesn't look very attractive for a dividend investor.

And the yield looks even less enticing when you realize that the date for Intel's annual dividend increase came and went in 2013 and 2014 yet the dividend remained at $0.90 annually. Some investors have been taken aback by the missing increases in Intel's dividend history. It signaled a lack of confidence among management that the company can return to earnings robust enough to enable larger payouts to investors.

Further, mostly negative revenue growth in the past several years isn't a good sign for potential dividend increases in the future, either.

The pros
But as Intel makes progress on the headwinds it faces in its transition to an increasingly mobile semiconductor environment, the outlook is improving. In Intel's most recent quarter, for instance, it guided for gross margins for the rest of the year at about 63%, up from previous guidance of 61%. Greater profitability boosts the possibility for dividend increases in the future. And a return to revenue growth should help, too. Intel's guidance for revenue in 2014 is for 5% year-over-year growth, up from slightly negative growth in 2012 and 2013.

Dividend increases in the future or not, every dividend investor knows that dividend reliability is the highest priority in building a portfolio of solid bets for dividend income. How is Intel holding up on this front?

Kirk Skaugen, senior vice president and general manager of the PC Client Group at Intel, holds up the world's first 14nm fanless mobile PC reference design from Intel. Image source: Intel.

Fortunately, Intel boasts one of the strongest economic moats, or sustainable competitive advantages, in tech. In a capital-intensive industry spurred by big manufacturing and research-and-development costs, Intel benefits as the largest player that can always outspend its peers. So even when Intel falls behind in semiconductor innovation in a particular area, it can usually catch up by outspending peers on research and development and superior manufacturing.

The Motley Fool's senior semiconductor specialist, Ashraf Eassa, weighs in on the sustainability of Intel's dividend.

I think Intel's current dividend yield is quite sustainable -- the company is a cash generating machine. The question facing investors now, especially as Intel hasn't increased its dividend in quite some time, is whether this dividend can continue to grow into the future. I think as the company's core business returns to growth, and as its losses in mobile narrow, the business will generate significantly more free cash flow -- paving the way for dividend increases over the next year or two.

Looking at several key metrics, it appears that Intel's financial state is certainly healthy enough to make the stock a solid and sustainable dividend bet. The company is undoubtedly a cash cow, with $0.17 of every dollar of sales turning into free cash flow, or the cash left after operations are taken care of and capital expenditures are accounted for. And a conservative payout ratio, or dividend payout divided by earnings, of 48% suggests Intel has room to increase its dividend, or at least sustain its current level in the case that the company runs into some turbulence.

Thanks to Intel's wide economic moat, cash-cow characteristics, and potential for dividend increases in the coming years as the semiconductor giant works out the kinks in a more competitive mobile environment, Intel is still a solid bet for dividend investors after the recent jump in the stock price.

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