The smart home market -- which includes automated lights, thermostats, security cameras, TVs, appliances, and other gadgets -- could grow from $24.1 billion in 2016 to $53.5 billion in 2022, according to Zion Market Research. Those devices should play a key role in the growth of the Internet of Things (IoT) market, which consists of various connected devices across multiple industries.
Amazon (NASDAQ:AMZN) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, which respectively sell the Echo and Home smart speakers, are often cited as top plays in that market. But neither Amazon nor Alphabet pays a dividend.
Over the past few years, Qualcomm has diversified away from mobile chips due to the entrance of cheaper chipmakers and first-party chips from leading OEMs. That's why it bought IoT and automotive chipmaker CSR in 2015, and why it recently agreed to buy NXP Semiconductors, the biggest automotive chipmaker in the world.
Qualcomm is leveraging its leading position in mobile chips to expand into the IoT market. In May, Qualcomm claimed that over 125 million TVs, home entertainment systems, and other connected home products powered by its chips have been shipped. It also reported that over 1.5 billion IoT devices powered by its chips have been shipped to date, and that it ships over a million chips per day for connected applications. To accelerate that growth, Qualcomm provides reference designs and development kits to developers.
Most of Qualcomm's revenue still comes from mobile chips for smartphones, but that could gradually change as its IoT business expands. For now, it remains a cheap stock with a high dividend -- its P/E of 19 is lower than the industry average of 25 for semiconductor companies, and its forward yield of 4% is well-supported by a payout ratio of 71%. It's also hiked that dividend annually every year since 2003.
Intel is diversifying away from its slower-growth PC and data center businesses with IoT chips for various industries. The IoT unit, which it formed in late 2013, accounted for just 5% of its revenues last quarter, but it remains a key growth market for the aging chipmaker.
Intel is leveraging its reputation in the PC and data markets to sell IoT chips (like the button-sized Curie, SD-card sized Edison, and low-power Quark processors) to home automation companies. Intel also offers reference designs and development kits to simplify the process for developers.
Intel doesn't disclose exact shipment figures for its smart home devices. However, it's stated that it plans to go "beyond the four walls of the home" by incorporating wearable devices and augmented reality devices. It also claims that its depth-sensing RealSense cameras and True Key biometric technology will improve the security of connected homes.
Intel's smart home business probably won't bear fruit until years down the road, but it remains a cheap income play for now. The stock trades at just 15 times earnings, compared to the industry average of 25, and it pays a forward yield of 3.2%. That dividend, which has been raised annually for the past three years, is supported by a sustainable payout ratio of 45%.
Microsoft recently introduced Invoke, a Cortana-powered smart speaker that will challenge Amazon's Echo and Google Home in the smart home market. The Harman Kardon-produced speaker ties multiple Windows 10-powered devices together via Cortana -- which could be a great feature for homes with multiple PCs. It can also be used to make Skype calls, making it a potential replacement for the home phone.
Microsoft claims that 145 million people use Cortana, which gives it a built-in audience, but it could struggle to catch up with Amazon and Google. That's why it recently enlisted Intel to develop Cortana as a "universal platform" for all smart home devices. Simply put, a user can simply tell any device (a PC, tablet, phone, or speaker) running Cortana to control smart home devices.
Expanding Cortana to smart homes should boost Microsoft's all-important cloud growth, which it uses to offset the more sluggish growth in Windows licenses. Patient investors get paid to wait -- Microsoft pays a forward yield of 2.1%, which is easily supported by a payout ratio of 66%. Its P/E of 32 runs hotter than the average P/E of 31 for infrastructure software providers, but that premium might be justified by the recent growth of its cloud businesses.
The key takeaway
The smart home market is still a fragmented one, and even leading players like Amazon and Google aren't generating much revenue with these next-gen products yet.
But the current war is being waged over ecosystems instead of revenue, with the aforementioned companies scrambling to connect their products to the ever-expanding web of home automation devices and IoT gadgets. It's unclear which company will emerge victorious, but investors can at least be paid to wait with these solid dividend stocks.