Finding an attractive dividend stock in the technology sector isn't difficult, despite the notion that tech companies are miserly when it comes to showering some love on shareholders. After all, dividend titans such as Intel, Seagate Technology, Qualcomm, and Cisco have a handsome payout that exceeds the sector's average yield of just 1.1% by a wide margin.
What's more, a closer look at the dividend-paying stocks in the tech sector throws up some interesting names that could become the next Cisco or Intel. Let's take a look at two tech names -- Skyworks Solutions (SWKS 1.65%) and Maxim Integrated Products (MXIM) -- that already pay a solid dividend, but also have the potential to increase their payouts consistently in the future.
Skyworks has been paying a dividend since 2014. Impressively, the company has raised its payout every year since initiation. In fact, it recently bumped up the quarterly payout by 19% to $0.38 per share, which translates into a yield of 1.70%. Now, you might not be very impressed by Skyworks' dividend yield at first, but you will surely be intrigued by the fact that it has got a lot of room to increase the payout.
After the recent dividend increase, Skyworks's annual dividend expense will come to approximately $272 million based on the number of shares outstanding. The company has generated around $914 million in net income over the trailing 12 months. So, it will be paying 29% of its trailing net income in the form of dividends even if there is no earnings growth over the next year.
As such, the company is sitting on a comfortably manageable dividend payout ratio that could be increased in the future to return more value to shareholders as some important catalysts materialize.
For instance, Skyworks is all set to benefit from emerging technologies such as the Internet of Things (IoT) and 5G wireless. IoT, for example, is already an important catalyst for the company's nonmobile business, which now supplies 30% of Skyworks' total revenue. But this is only the beginning, as the chipmaker's partnerships with the likes of Sierra Wireless and Philips will allow it to get into fast-growing markets such as smart lighting and machine-to-machine (M2M) connectivity.
Sierra, for example, is a global leader in M2M connectivity with a third of the market under its control. The IoT specialist is using 17 Skyworks devices to power its M2M wireless modules. This could be a big deal for Skyworks in the long run, as the global M2M module market is expected to clock an annual growth rate of 23% through 2022, according to TechNavio.
It won't be surprising if Skyworks continues clocking double-digit earnings growth over the long run. Moreover, the rise in net income will help the company boost its free cash flow. This is a green flag for investors since management is focused on returning all of the free cash flow back to shareholders in the form of dividends and share repurchases, paving the way for further dividend growth at the chipmaker.
Unlike Skyworks, Maxim Integrated has a handsome yield and a longer payout history. The chipmaker has been regularly paying a dividend since 2007, and after the latest 10% hike, its yield stands at just over 3%. This fat yield is a result of Maxim's generous payout ratio of 60% as management returns all of its free cash flow back to shareholders.
Maxim's free cash flow generation in the recently concluded fiscal year was $932 million, excluding a one-time payment of $178 million to the IRS. The company paid out dividends worth $438 million, while $408 million was spent on share repurchases. So Maxim used 47% of its free cash flow for paying dividends, which is a much more conservative figure.
In all, the increase in the company's free cash flow has been the key to the consistent growth in its payout. Maxim needs to increase its free cash flow if it wants to extend its eight-year history of raising the payout, and that can be achieved by boosting the bottom line. The good part: Wall Street expects Maxim's earnings to grow in the mid-teens over the next five years. But it won't be surprising if it exceeds that expectation thanks to fast-growing end markets.
The automotive market is one of Maxim's biggest catalysts. The chipmaker currently gets 22% of its total revenue from this segment, though it looks all set to make a bigger contribution because Maxim has struck deals with most of the major tech companies that are looking to enable connected cars.
Its clients include the likes of NVIDIA and Qualcomm, two chipmakers that have established a solid base in connected and self-driving cars. NVIDIA, for instance, is bolstering its self-driving platform with the help of Maxim's high-speed integrated circuits. Given that NVIDIA has a huge ecosystem of more than 200 partners developing self-driving cars using its platform, Maxim could win big with this partnership.
However, Maxim's automotive business is a lot more diversified. The company says that 28 automotive OEMs (original equipment manufacturers) have decided to use its designs, and there are more than 70 cars being manufactured using its chips. As more connected cars hit the road in the future (and there are going to be a lot of them), Maxim's automotive revenue will keep getting better.
A Bright Future
Both Skyworks and Maxim Integrated are focusing on new technology trends such as the Internet of Things, connected cars, and 5G wireless technology. All these markets are still in their early phases of growth, and both companies have done well to cut their teeth in these areas. As such, both chipmakers look well-placed to boost their earnings going forward, which will give them room to improve free cash flow and increase the dividend payout.