When it comes to high-yield dividends, technology often isn't the first place to look. But if a combination of growth, modest dividend income, and higher future dividend payout potential is what you're after, you've come to the right place. In fact, this combination of growth and income can be the source of some serious wealth creation over the long term.
Mobile connectivity: 5G and income
Nicholas Rossolillo (Skyworks Solutions): Currently yielding 1.4%, connectivity chip designer Skyworks Solutions isn't going to show up on many dividend investors' radars. But this company has steadily increased its payout each year since it initiated its dividend back in 2014, including a 14% increase just announced in July. And thanks to its high profit margins, this semiconductor firm was able to maintain its share repurchase program amid the economic lockdown over the spring.
The 5G mobile network is the star of the show. Its launch could foster a smartphone upgrade cycle late this year or next. Additionally, Skyworks' Bluetooth and Wi-Fi 6 chips for connected industrial equipment, autos, and consumer electronics will benefit from the steady rise of connectivity around the globe. This could help Skyworks continue its journey toward diversification, since some half of its revenue is tied to Apple (NASDAQ:AAPL). After a sleepy few years, share prices are starting to reflect that outcome and are near all-time highs.
However, as I've explained in the past, companies that offer both rising dividend payments and business growth can generate serious upside over the course of a decade or more.
Skyworks checks all the boxes that could make for that type of winning formula. First, connectivity chips are becoming ubiquitous. Second, Skyworks generates free cash flow (revenue less cash operating and capital expenses) profit margins of about 30% and solid returns on its investments (return on invested capital was at 19% over the last year). Third, Skyworks has a policy of returning some of its extra cash generated to shareholders.
For investors looking for a long-term tech winner to hold for the next decade, Skyworks Solutions is dividend stock worth a serious look.
Growth, dividends, and strong target markets -- choose any three
Anders Bylund (Broadcom): Communications semiconductor designer Broadcom is both a fantastic dividend stock and an impressive growth story.
As a leading provider of communication chips for mobile devices and for the base stations that power wireless networks, Broadcom stands to win big in the rollout of 5G networks around the world. Phones compatible with 5G require higher-end networking solutions, raising the dollar amount of Broadcom chips found in each unit.
"The content has been up for 5G phones over 30%, way over 30%," CEO Hock Tan said in June's second-quarter earnings call. "It's not just [radio frequency], but it's also custom and it's Wi-Fi."
That chapter of Broadcom's growth history will play out over several years. Wireless network upgrades will take a long time, starting with large-scale installations in leading-edge markets and followed by slower installations in places that only recently installed 4G networks.
And Broadcom loves to share its cash profits with stockholders. The company generated $9.97 billion of free cash flows over the last four quarters. Roughly $4.9 billion of that cash haul was spent on dividend checks, and another $1.75 billion on net share buybacks. Management has committed to maintaining its dividend despite economic pressure from the COVID-19 crisis. The dividend yield stands at a generous 3.7% today.
Winning the most important investing metric
Billy Duberstein (Lam Research): It's not often that dividend stocks can "make you a fortune." Millionaire-making stocks are usually growth stocks that use all profits to reinvest in the business. However, I'd say that Lam Research offers a pretty compelling combination of growth and dividends, along with an A+ grade on the most important metric in investing: return on invested capital. Lam has earned over 50% on its capital each of the last three years on an adjusted basis, which is as good as you'll find in the market today.
How is Lam doing it? Lam is one of a few large companies producing highly technical semiconductor manufacturing equipment. Most of these companies have only one or two competitors for any given step in the manufacturing process, as the industry has consolidated over the years.
Furthermore, these companies benefit from large installed bases, which allow them to rack up historical data on defects and process missteps. This data can then be resold to customers in a compelling service offering that allows semi manufacturers to improve yields on the very complex and difficult process of making smaller, yet more powerful chips.
As evidence of this data advantage, Lam's customer support-related revenue grew 17% year over year last quarter, making up 33.2% of Lam's revenue. Unlike Lam's more cyclical and lumpy equipment sales, this high-margin service revenue should grow every quarter as Lam's installed base grows, adding a nice "base" to revenue and earnings.
The company's machine sales are growing in spite of the pandemic. In the second quarter, machine sales were up 18.8% year over year. The foundry and logic segments continue to be strong, as leading-edge 5G and artificial intelligence chips remain in demand.
Furthermore, the memory industry has shown signs of recovering after a year and a half of declines amid the U.S.-China trade war. There's only so much time before these companies need to invest again, as Lam's management sees NAND demand growing in the 30% range and DRAM bit demand growing in the high teens over the longer term. Manufacturers will need to buy more Lam machines in the long term, even if machine sales vary quarter to quarter.
While Lam's dividend today sits at just 1.2% or so, the company returns even more than that to shareholders via ample share repurchases. In fact, even though the company suspended its repurchases in March, management became confident enough to begin buying back stock even before the June quarter ended. Over the past 12 months, Lam's "total shareholder yield," counting dividends and repurchases, is at 3.9%, even with one quarter of very few repurchases. Management also reiterated its commitment to return 75%-100% of free cash flow to shareholders, including a rising dividend, over time.
Basically, Lam is a high-quality company with great growth prospects and a decent dividend that should also grow. What more could one want?