Intel: A Cheap Stock With a Dividend Kicker

I believe Intel (Nasdaq: INTC  ) has the right mix of value and income to soundly beat the market over the long haul.

After all, Vanguard Windsor Fund manager John Neff used that same value-plus-income strategy to beat Wall Street by three points per year for 30 years. That's a lifetime of great returns!

Whether you're new to dividend stocks or a grizzled veteran, Neff's secret formula remains relevant today. Here's how I used it to find Intel.

A one-two punch of powerful investing
Neff looked for opportunities using his total return ratio, given below:

(Analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio

According to Neff, a company whose total return ratio was 50% greater than that of the overall market stood a good chance of beating that same market, by offering a better value, a higher yield -- or both!

Today, the market has a total return ratio of roughly 0.95. (I used a Shiller P/E of 20.1, a yield of 2%, and two-year estimated earnings growth of 17.2%.) Thus, stocks with total return ratios greater than 1.43 could have market-beating potential.

Using Neff's criteria, the table below clearly shows that Intel offers more opportunity than its competition:

Company

2-Year Growth Est.

Yield (%)

P/E

Total Return Ratio

Intel

29.4%

3.3%

11.3

2.89

NVIDIA (Nasdaq: NVDA  )

28%

0%

23.8

1.17

QUALCOMM (Nasdaq: QCOM  )

17.4%

2%

20.5

0.94

Source: Capital IQ, a division of Standard & Poor's, and author's calculations.

The Foolish bottom line
Neff's total return ratio combines value and income, letting you profit from multiple expansion while collecting big, bad dividend payments along the way. And as Neff showed, value and income can collectively deliver market-beating returns. Neff's total return ratio may just be a starting point. But with a total return ratio of 2.89, Intel certainly looks like a cheap stock with a dividend kicker.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Intel is a Motley Fool Inside Value selection. NVIDIA is a Motley Fool Stock Advisor recommendation. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of QUALCOMM. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 26, 2010, at 3:32 AM, jrmart wrote:

    Apple's IPAD and IPhone4 use ARM designed chips, not Intel chips. Other Apple products use NVIDIA graphics, not Intel graphics. Lots of people today are talking about a slowing economy, or even a coming depression, yet a visit to an Apple store portrays a totally different picture with millions of IPADS, IPHONES and other Apple products flying out the door. The old difficult to use PC/Microsoft world is quickly being replaced by easy to use Apple products. The best thing about all these Apple products like the; IPAD, IPHONE4, IMAC, MAC PRO, IPOD TOUCH, MACBOOK, MACBOOK PRO, MACBOOK AIR, MAC MINI and APPLE TV is that they all magically communicate and update each other using ITUNES and Apple ME Cloud computing. Just think, just a few years ago almost everyone in the PC/Microsoft world thought that Apple was going out of business.

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