11 Incredible Dividend Stocks: Intel

This article is part of our weeklong series on 11 incredible dividend stocks. You can get the lowdown on this series by clicking here.

"Intel (Nasdaq: INTC  ) for income." I admit that it sounded very strange when I first said it out loud. Intel is a master of Silicon Valley, a tech revolutionary, but not a well-known dividend darling.

Oh, how times have changed -- and for the better.

Intel has become one of the bluest of blue-chip stocks, with a fabulous dividend. What's more, the company generates plenty of cash flow, giving management lots of power to keep the dividend growth going up, up, up over the next decade. Yield plus growth? What more could income investors ask for?

The business
In Silicon Valley, Google knows search, eBay knows auctions, and Intel knows chips.

Intel makes microprocessors for desktop, laptop, and server computers. The company's crown jewel is its PC client group, which sells processors for personal computing. The segment generated $31.6 billion in sales in 2010, more than three times as much as the data center group, which makes chip for servers.

Wintel -- the industry nickname for the combination of Microsoft's (Nasdaq: MSFT  ) Windows operating system and Intel's microprocessors -- has long been the dominant force in computing, and it remains strong today. Sure, AMD (NYSE: AMD  ) has been a thorn in Intel's side, but that competitor has never been able to make a serious dent in Intel's leadership position. For Intel and AMD, the 80/20 rule remains intact: About 80% market share by microprocessor shipments for Intel, and about 20% for AMD. That's the way it has been and likely will be going forward. Intel is the titan of the computer processor industry.

Company Intel
Dividend Yield 3.8%
5-Year Dividend Growth Rate 14.5%
Payout Ratio 30.0%
Paying a dividend without interruption since 1992
Why it's incredible
Intel makes the most of its leadership position by generating what income investors love most: cash flow to pay the dividend. Just look at the chart below.

Metric

2006

2007

2008

2009

2010

Cash from operations $10,632 $12,625 $10,926 $11,170 $16,692
Dividends $2,320 $2,618 $3,100 $3,108 $3,503

Source: Capital IQ, a division of Standard & Poor's.
Figures in millions.

Over the past five years, the company produced $62 billion in cash flow and paid shareholders an incredible $14.6 billion in dividends. Better yet, that dividend just keeps growing and growing. It's grown 14.5% on a per-share basis. Given Intel's propensity to turn its dominant position in the chip business into plenty of cash flow, I don't expect that growth to stop.

Dividend strength
Three other factors will keep Intel's dividend healthy and growing. First, Intel ended the first quarter of 2011 with just less than $12 billion in cash, following its acquisition of security specialist McAfee. Second, even after Intel announced a 16% dividend increase last quarter, the company's payout ratio, the ratio of dividends paid to net income is still strong; it stood at just 30.6% in 2010. And lastly, management remains committed to returning capital to shareholders in the form of dividend and share repurchases. This combination gives management plenty of room to increase its quarterly dividend over time. I believe the market is overlooking those facts right now, making Intel a very attractive investment today.

Risks
Although I've made a strong case that Intel has and will have lots of cash to give back to shareholders, there are a few things that can get in the way. The biggest risk would be a steady decline in PC sales. This would cut into Intel's largest business segment, making less cash available to pass on to investors. I see acquisitions as the other biggest risk to my cash flow thesis. The jury is still out on whether the McAfee acquisition will produce the desired benefits. Another big purchase would wipe out the company's savings account, putting future dividend increases at risk.

In sum
When I think of great dividend-paying stocks, Intel isn't the first one that comes to mind. But I think that's what makes it such a great opportunity -- few investors are thinking about the company this way, today. Intel may not be the fast-growing tech company it once was, but I think its dividend is going to grow very nicely for a long time.

David Meier is associate advisor for Million Dollar Portfolio. He does not own any of the stocks mentioned. The Motley Fool owns shares of Google and Microsoft. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Google, eBay, and Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (22)

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 June 10, 2011, at 10:26 PM, Bristinwolfsong wrote:

    It would be better if they would reduce their share count instead of steadily increasing year over year

  • Report this Comment On June 10, 2011, at 10:42 PM, TheDumbMoney wrote:

    I just re-ran a discounted free cash flow analysis on Intel because, you know, that's what I do on a Friday night if I'm home earlier than my wife is. And by my accounting, including cash net of debt, the market is pricing Intel never to increase its free cash flow by more than 2% from now until eternity. So. Yeah.

  • Report this Comment On June 10, 2011, at 10:59 PM, DonkeyJunk wrote:

    Phone chips and a tablet forthcoming. Intel is primed to start grabbing market share in the current whiz-bang markets as well. They took their sweet time, but that just means a longer buying window before new products begin to take effect.

  • Report this Comment On June 12, 2011, at 11:21 AM, JeramyUtara wrote:

    This question doesn't 100% relate to this article, so I apologize in advance.

    Let's say that the record date for getting paid a dividend is this Friday, the 17th. At what point in that day does the "recording" take place? For example, if I buy in Thursday night and sell Friday after-market, do I still get the dividend or do I have to hold it until the open of the next trading day?

  • Report this Comment On June 13, 2011, at 11:24 AM, efrainrojas wrote:

    Numbers can be misleading when not contained within an anecdotal "common sense" context. If Intel does not find a way into the iPad ecosystem and mobile phones specifically, it will face a steady erosion of its relative position in the chip industry.

    I challenge you to walk into any major consumer electronics retail store and take a hard look at non-Apple tablets. You will indifferent staff, non-working floor models and zero interest from consumers.

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