Investors have become accustomed to treating Qualcomm (QCOM -1.75%) as they would any other stock in big tech. These investors may not see it as a dividend stock, let alone a dividend investor's dream stock.
What they may not be aware of is that Qualcomm began uploading dividends to its stockholders in 2003. It has increased this payout in most years and has never slashed it.
Now, this dividend could go much higher. Thanks to a rare but lucrative opportunity, Qualcomm stock could not only surge in value, but it could also experience massive payout hikes as the chip stock connects more strongly to growth.
Qualcomm is an underappreciated dividend stock
Today, Qualcomm pays out $2.60 per share on an annual basis. Thanks to robust cash flows, the company can easily afford this payout. In the previous quarter, Qualcomm spent $734 million on payouts. This is well below the free cash flow of almost $1.4 billion during the same period.
Qualcomm's dividend yields about 1.7% today. While that may not appear high, it exceeds the current S&P 500 yield of around 1.6%.
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This yield percentage had been much higher in the recent past. Qualcomm stock began to experience massive price increases following the settlement of some lawsuits with Apple. As most investors know, a rising stock price lowers the dividend yield.
While a high dividend yield is attractive to investors, the massive growth in the stock price can also upload dividend increases. This year, Qualcomm's dividend rose by less than 4%. However, the company had a history of annual payout hikes of more than 10% for much of the last decade.
The case for Qualcomm stock
Additionally, to believe in potential payout hikes, investors need to understand the opportunity for growth. The revenue and earnings increases have occurred because Samsung, Apple, and other manufacturers have begun to produce devices compatible with 5G wireless networks.
Fortunately for Qualcomm, it is the only company that makes a 5G chipset that makes these devices possible. Analysts expect 5G speeds to rise by up to 100 times from those of 4G. Hence, the need to keep up with tech advances will force most users to upgrade their smartphones eventually.
The opportunity that creates is enormous. Grand View Research forecasts a compound annual growth rate (CAGR) at 63% through 2027 for 5G adoption. With the company's dominance of this market, virtually all of the benefit should accrue to Qualcomm.
Qualcomm has already seen massive growth as a result. In the latest quarter, GAAP revenue surged by 73% compared with the same quarter in 2019.
The stock has risen by more than 70% since the beginning of the year. However, investors have only slowly noticed this opportunity.
The forward price-to-earnings (P/E) ratio for the stock stands at only about 21. This is extremely low considering the growth opportunity.
In comparison, NVIDIA operates in a different segment of the chip industry but has also experienced massive growth. It trades at a forward P/E of around 46, even though it faces more competition than Qualcomm.
Due to this potential for a higher valuation, I expect the massive growth in Qualcomm stock to continue into next year.
The bottom line
At first glance, Qualcomm does not look like a dividend investor's dream, with a modest valuation and an average payout.
However, it is the only company producing a crucial smartphone chipset necessary to drive progress in wireless communication. In the end, investors will pay about 21 times forward earnings to buy the leader of an industry predicted to experience 63% growth.
If Qualcomm's earnings come anywhere close to that number, the stock price should surge much higher over time. As profits experience that massive increase, shareholders will likely benefit as the Qualcomm dividend experiences its own upgrade cycle.
