What better way to end a most forgettable year than to purchase some stocks that will pay you dividends? In fact, Broadcom (AVGO 2.99%), Orange SA (ORAN -0.80%), and Applied Materials (AMAT 0.73%) are in tip-top shape, so no matter what may be in store for the stock market in 2021, these companies look like a solid bet on earning some passive income. Here's why our Fool.com contributors think so.
A chip giant riding a new hardware upgrade cycle
Nicholas Rossolillo (Broadcom): As far as semiconductor stocks go, recessions can be tough times. But COVID-19 induced no ordinary recession. While not all chip stocks were immune to side effects, there was plenty of demand for technology this past year as organizations scrambled to keep their operations moving forward and consumers stocked up on electronics to pass some extra time at home.
For networking gear giant Broadcom, it equated to a pretty good year considering the circumstances. Revenue increased 6% year over year during the company's fiscal 2020, including a 12% jump in Q4 revenue to $6.5 billion. Infrastructure software led the way higher, consisting of Broadcom's acquisition of data center network management outfits Brocade, CA Technologies, and most recently Symantec's Enterprise Security, the remnants of which are now NortonLifeLock (GEN -1.34%). Chip sales were down 1% for the full-year period but were up 6% in Q4, with business from Apple's (AAPL 0.52%) iPhone 12 and other 5G mobile applications returning Broadcom's bread-and-butter to growth mode.
Even better than the top-line growth, though, was Broadcom's solid execution in trimming up its operations to boost profitability. Free cash flow (revenue less cash operating expenses and capital expenditures) increased a whole 25% to $11.6 billion in 2020. That's ample positive free cash flow to cover the dividend (which cost Broadcom just $5.53 billion in the last 12 months) and service its long-term debt of $40.2 billion (long-term debt peaked at $45.0 billion at the end of the second quarter).
Even after rising some 34% 2020 to date, shares are pretty darn affordable at just 15.4 times trailing 12-month free cash flow. Add in the manageable 3.4% annual dividend yield Broadcom pays, and I say this remains a solid treat-yourself stock purchase with 2021 right around the corner.
Image source: Getty Images.
Try a fiber-rich Orange diet with a side of massive dividend yields
Anders Bylund (Orange): French telecom Orange SA might not be the first dividend play that springs to mind in today's market, despite its generous 5.8% yield. The company won't join the exclusive club of Dividend Aristocrats anytime soon, because Orange is not afraid to lower its payouts when the cash can be put to better use elsewhere. This attitude is a big turnoff to many American income investors, who expect an unbroken string of annual payout increases. However, occasional dividend cuts are a common practice in overseas markets like Europe and Asia.
That being said, Orange recently boosted its semiannual payout from 0.30 to 0.40 euros per share at a time when many rivals are reducing their payouts to save their previous cash. The management team is encouraged by rising revenues and strong cash flows in 2020. Looking ahead, the company continues to expand its global footprint of mobile network services. Furthermore, CEO Stephane Richard expects Orange's heavy investments in a fiber-optic network infrastructure to pay off in the next few years.
"If I look to the European telcos, Orange is the fiber stock. Orange is the company who puts the maximum priority to fiber," Richard said at an industry conference in September. "We have, today, Orange fiber footprint in Europe, which is above the total combined of the 3 other big European telcos."
That's important, because Richard expects a broad-based market shift in this direction.
"So we are the one who has prepared in the best way, in my view, what will be the next-generation fixed broadband networks everywhere in the world, which will be fiber to the home," the CEO continued.
Orange should be able to collect higher average revenue per user as the entire telecom sector attempts to catch up with this company's market-leading assets and services.
When all is said and done, Orange's dividend is powered by massive cash flows that spring from an ambitious growth strategy on a global level. Lock in that attractive dividend yield at the low valuation of 10 times trailing earnings and sit back to collect both rising stock prices and fantastic dividend checks over the next few years.
Essential machines for a connected future
Billy Duberstein (Applied Materials): Applied Materials' stock is up a whopping 47% on the year already. But you know what? It's still among the best deals in tech. Applied is the largest semiconductor equipment manufacturer by revenue, with a comprehensive product portfolio spanning etch, deposition, metrology, and inspection tools for both semiconductor and memory chip manufacturing. As such, it's poised to benefit from any increased spending on semiconductor manufacturing.
That scenario certainly seems likely. According to SEMI, the global semiconductor industry association, the amount of spending on semiconductor equipment is forecast to grow 16% this year to $68.9 billion, then continue increasing to $71.9 billion in 2021 and then $76.1 billion in 2022. The semiconductor equipment industry is known to be cyclical, so some might find these estimates too optimistic. But it's also why Applied Materials is so cheap compared with the rest of the technology sector, at just 18 times next year's earnings estimates. And while its 1% dividend may not turn many heads, Applied's payout ratio is very low at just 22%, leaving plenty of room for dividend growth and share repurchases.
There's also reason to think the industry may become more of a consistent growth industry, as SEMI predicts. Across the industry, large semiconductor foundries are racing to catch up to leader Taiwan Semiconductor Manufacturing (TSM 2.71%) in capability. For instance, Samsung recently announced a $116 billion spending plan over the next few years to catch up in the outsourced foundry business.
And it's not only companies that are competing, but also countries. China is still hoping to grow its domestic chip business, and the U.S. just passed legislation that will give incentives and subsidies to domestic chip manufacturing on U.S. shores. All of these entities competing for chip supremacy will have to buy lots and lots of Applied's machines.
In addition, the NAND flash industry is currently rebounding from a down year in 2019, as five major competitors race to make the most efficient storage chips. Finally, the DRAM industry, which has seen two straight years of spending declines during the trade war, finally seems set for a rebound in 2021.
As chips have become smaller and more advanced, manufacturing is currently running up against limits to Moore's Law, which forecasts that the amount of transistors per chip will double every one to two years. As we've seen, that is becoming harder and harder to pull off. However, the highly complex and difficult nature of chip manufacturing only puts more importance on equipment makers like Applied Materials. That makes the stock a solid buy for 2021 even after its impressive 2020.
