Rather than picking winning consumer tech stocks, investing in the companies that supply or power the technology sector has recently been a popular way to tap into the tech industry's growth.
Many investors have turned to buying a broad basket of semiconductor companies -- or a semiconductor ETF, for that matter -- to do just this. However, as in all industries, the semiconductor market has its winners and losers.
The world's largest semiconductor company, Intel has established its business empire by building dominant franchises supplying processing power to the PC and server industries. The company controls an estimated 99% and 87% of the two multibillion-dollar hardware markets. This market dominance, in turn, affords Intel massive pricing power, as evidenced by its 60.9% gross margin during its fiscal 2016.
The past several years haven't been the best in Intel's vaunted corporate history. The company completely missed the smartphone revolution because of its longtime product-development strategy, which centered on maximizing processing power without regard for power usage.
Rather than focus on breaking into the smartphone market, Intel has applied its hard-won lessons to make sure it doesn't miss out on coming future trends such as artificial intelligence (AI), self-driving cars, and the Internet of Things. Intel has implemented an aggressive acquisition approach when necessary -- its recent $15.3 billion Mobileye buyout is the most prominent example -- and the future is once more looking bright for the semiconductor giant.
As a dividend stock, Intel sports an enviable track record. Over its past 10 fiscal years, the company has increased its annual dividend per share from $0.45 in 2007 to $1.04 in 2016. Intel stock current yields 3%, well above the market averages. All of this is to say that Intel is without question one of the top income investments among semiconductor companies today.
One need only to look at graphics-chip pioneer NVIDIA's stock chart over the past five years to get a sense of the company's enviable prospects; its shares have risen over 700% during this time frame.
NVIDIA designs and manufactures specialized semiconductors called graphics processing units (GPUs). For years, NVIDIA's high-performance GPUs, which rendered video playback much faster than the generic PC GPU, operated as a relative niche, largely catering to die-hard gamers and other power users to whom graphics processing horsepower was particularly important.
All that changed in recently, as emerging technologies such as AI and deep learning began to gain commercial adoption. Training the neural networks that will power everything from cancer-detecting software to self-driving cars requires that they can distinguish a cancerous tumor from a vital organ or a pedestrian from a fire hydrant. Teaching neural networks is done by feeding them reams of images, which requires immense amounts of high-end graphics processing capabilities, which NVIDIA is perfectly suited to provide. And with the market for AI-powered technologies very much in its infancy, many investors feel the company's best growth years may lie ahead of it.
As a dividend stock, NVIDIA is a little disappointing. Its shares currently yield only 0.4%. The company is also fairly new to paying a dividend, having only initiated its cash distributions in 2012. NVIDIA has done a nice job growing its dividends over this period, having increased them from $0.30 per share annually to $0.51, and it's increased its annual dividend payments every year since 2012. However, given the magnitude of its growth opportunity and the paucity of its payout, NVIDIA is probably best suited for investors seeking total return rather than meaningful income generation in the near term.