Buying and holding quality companies that have a consistent record of growing revenue and profits is an effective way to build wealth over the long term. But finding growth stocks that pay shareholders some cash along the way can sweeten your returns.
Texas Instruments (TXN 1.32%) and Activision Blizzard (ATVI) are two growth stocks that have a proven record of consistently raising their payouts to shareholders. Even better, both companies raised their dividends more than 10% in the last year, making them worth considering to buy and hold for the long term.
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A cash-gushing chip stock
You might know Texas Instruments as the classic calculator brand, but it's much more than that these days. TI makes processors for a range of consumer electronics, such as TVs and home appliances. It even supplies chips for Apple's iPhone XS. But 54% of its business is selling chips into the industrial and automotive markets, and that percentage has been gradually moving higher in recent years.
Supplying chips to factories, car manufacturers, aerospace companies, and the energy sector is TI's fastest-growing business. Management has been investing heavily in these markets because they offer better growth potential and better profitability. Industrial and automotive companies are using an increasing amount of technology today. Factories are using more robots, and cars are becoming computers on wheels, which plays to the strengths of Texas Instruments.
But what TI is really in business to do is reward shareholders. Management's goal is to return 100% of free cash flow back to shareholders each year. Every move management makes is to maximize long-term free cash flow and distribute that back to shareholders in the form of dividends and share repurchases.
The company has increased its dividend for 14 consecutive years, and it currently pays a dividend yield of 2.90%. Since 2004, the dividend has grown at a compound annual rate of 24%, and the company just increased its quarterly payout another 24% to an annualized amount of $3.08 per share. You would be hard-pressed to find a more shareholder-friendly company with good growth prospects than Texas Instruments.
A cash-rich gaming empire
Activision Blizzard is the maker of best-selling video game franchises Call of Duty, Overwatch, and World of Warcraft. Through its 2016 acquisition of King Digital Entertainment, the game maker's lineup also includes top mobile game Candy Crush. Those four games comprise about two-thirds of the company's annual revenue.
Activision is just about the only pure-play video game company that pays a dividend. It increased the dividend 10.8% per year since 2010 (the first year it started paying one). Activision doesn't pay a quarterly dividend like many dividend payers do. Instead, the company pays out an annual dividend, which is usually distributed in May each year.
This year Activision increased its payout 13% to $0.34 per share, which brings the dividend yield to 0.42%. That pales in comparison to Texas Instruments, but Activision only paid out about 14% of its free cash flow per share as dividends this year. This gives the game maker a lot of room to grow the payout over time.
Additionally, Activision has a good record of growing its free cash flow per share, which has led to a growing dividend. Since 2010, the company's free cash flow per share has increased at a compound annual rate of 14.6%. Activision has released several new games over the last seven years that have driven revenue. Also, it has benefited from the industry's shift to digital distribution of games, which has kept margins high.
Lately, management has been focused on the booming esports market, where the company has been turning Call of Duty and Overwatch into mainstream spectator sporting events. Activision has also been aggressive in turning its Overwatch franchise into a large entertainment property with branded cereal and toys. There's even a Marvel-like Call of Duty universe planned for the big screen.
These efforts are a sign of the times. Video games have become mainstream sources of entertainment for millennials, and that puts Activision in a prime position to experience tremendous growth over the long term.
One last word
Texas Instruments and Activision Blizzard are completely different companies but have a few things in common. Both have shareholder-friendly management teams that are allocating capital to areas that should grow revenue and free cash flow over the long term.
Also, both companies generate very high amounts of free cash flow as a percentage of sales, which is another way to gauge profitability. TI's free cash flow margin is 36%, while Activision's is 26% over the past year. These are truly cash-gushing companies with good growth prospects that should make for a steadily growing stream of dividends over time.
