Yield-seekers have had it tough in the post-2008 era. In the wake of the Great Financial Crisis, interest rates came down to record lows, which made traditional yield instruments such as bonds much less profitable. And thanks to a decade of tepid growth and the onset of the COVID-19 pandemic, today's interest rates are still at rock-bottom. The 10-year U.S. Treasury bond, which is a common benchmark against which other assets are priced, yields just over 1.5% today.
Adding more complication, disruptive technology stocks have accounted for a large amount of market gains over that time, and most of those don't pay a dividend. In fact, many have disrupted mature dividend payers. As a result, high-dividend stocks of mature companies have often been bad overall investments in recent years.
Today, the best bet for yield seekers may be in a few stocks that pay decent, Treasury-beating dividends, but which also play in next-gen technology, with the ability to grow that payout over the next decade.
Here are three top-tier semiconductor names that do just that.
Taiwan Semiconductor Manufacturing: 1.6% yield
Taiwan Semiconductor Manufacturing (TSM -2.06%) is the world's largest foundry, with a lead in the most advanced semiconductor manufacturing techniques. Given the difficulty and time required to scale up modern semiconductor processes, that lead looks fairly safe for at least the next few years. That means the world's leading fabless semiconductor designers, from Apple to Qualcomm to Advanced Micro Devices, all depend on Taiwan Semi's manufacturing capabilities -- a pretty good spot to be in.
That's especially true since we are currently in a golden age of semiconductor demand, as the pandemic has accelerated demand for digitization. TSM just had its September earnings release last week, where it said its own capacity will remain tight through 2022 because there is so much demand.
Last quarter, Taiwan Semi's revenue grew 16.3% and earnings per share grew 13.8%, which was solid considering the company is also coming off a banner year in 2020. Though management hasn't given details, recent reports indicate Taiwan Semi will be raising its prices between 5% and 20% to certain customers to offset the increased heavy investments this year. That type of pricing power is indicative of Taiwan Semi's current competitive advantages.
Investors should also look ahead to more growth. Taiwan Semi is going to spend over 50% of its revenue on capital expenditures this year, up from 38% last year. That heavy spending is a prelude to more revenue and profit growth, so Taiwan Semi appears set for high growth for the next few years at least. That makes the company's 1.6% dividend and 24 times forward P/E ratio attractive, especially since that payout should grow handsomely along with earnings for the next decade.
Texas Instruments: 2.4% yield
Another competitively advantaged semiconductor producer is Texas Instruments (TXN -1.32%), a leader in analog and embedded chips, with a concentration in automotive and industrial automation end markets. Those two end markets should benefit from increased semiconductor content as both cars and factories become "smarter" in the years ahead.
Texas Instruments has an incredibly high-return and efficient business model, a result of the company's terrific capital allocation and concentration on free cash flow per share. These management decisions have allowed TI to increase its dividend 51.7 times over since 2004, a stunning 18-year track record of dividend growth that continues this month, when Texas Instruments will raise its dividend per share 13%.
Revenue was up a whopping 41% last quarter and operating income up 80%, though that may not have been the best comparison, as the second quarter was lapping the depths of the pandemic. Some may be concerned that TI may not be able to capitalize on surging demand from supply constraints, but it should be in a good position. TI has its own owned capacity, which puts it in a position to increase output and gain market share when others may be constrained. The company also has two more plants set to come online next year, which will bring on lots of more capacity to keep up with surging chip demand.
Texas Instruments isn't the cheapest stock, at 23.4 times next year's earnings estimates, but its low-risk business model and history of dividend growth make a solid pick for yield-seeking investors.
Broadcom: 2.9% yield
Whereas Taiwan Semi is the leading outsourced semiconductor foundry for leading-edge chips, and Texas Instruments is the leading producer of lagging-edge analog and embedded chips, Broadcom (AVGO -1.34%) gets its economic moat from its diversity. Thanks to an aggressive acquisition strategy, Broadcom has assembled a diverse array of semiconductor capabilities with over 20,000 patents, mostly in communications applications such as broadband, 5G, and data centers. Not only that, but the company has even diversified into software for infrastructure management and cybersecurity. Software tends to be steadier than the more cyclical chip industry, and the diversity should smooth the peaks and valleys of chip sales.
However, the semiconductor industry may not be so cyclical anymore. Broadcom has generated growth each of the past five years, with surging free cash flow and a dividend that has grown at a 49% annualized rate for five years, from $1.94 back in 2016 to $14.40 in 2021. By wringing out synergies across past acquisitions, Broadcom makes incredibly high free cash flow margins, which came in at 51% of revenue last quarter.
Broadcom has the highest yield of these safe dividend stocks and is the cheapest of the three, at just 16 times next year's earnings estimates. Yet its 2.9% dividend is covered more than two times over by the company's ample free cash flow, meaning it's safe. That payout should also get a boost in December, when the company reports its fiscal fourth quarter and typically raises its dividend for the next fiscal year.
Though it trades at a relatively low valuation, Broadcom's portfolio is still poised for growth, as it makes chips for the next Wi-Fi and wireless standards (Wi-Fi 6 and 5G) and, like Texas Instruments, also sells chips to enhance automobile and industry automation. All of these trends should increase demand for its chips over the next decade, propelling Broadcom's ample dividend higher.