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Want $2,500 in Annual Dividend Income? Invest $106,000 in This Tech Stock

By Trevor Jennewine – Oct 19, 2021 at 6:15AM

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This semiconductor company could make you richer in more ways than one.

Some investors mistakenly equate dividend stocks with slow growth, but historical data refutes that idea. Between 1973 and 2020, dividend-paying stocks in the S&P 500 actually outperformed the broader market, and those that raised their dividend regularly did even better.

Texas Instruments (TXN -0.71%) is a perfect example. This semiconductor company has raised its quarterly payout every year since 2004, and over the same period, its share price has skyrocketed 560% (excluding dividends), outperforming the S&P 500 by a wide margin.

Going forward, I expect both trends to continue. That means shareholders should benefit from market-beating returns and a rising quarterly dividend, helping them generate wealth in two different ways. Here's why I think that's possible.

Mature man sits in a red chair by a window while looking at a tablet.

Image source: Getty Images

The case for share price appreciation

Texas Instruments specializes in analog chips and embedded processing products. The former are used in all electronic devices, where they convert real-world signals like sound and heat into digital signals. And the latter are present in nearly all electronic devices, where they perform a dedicated function such as powering a microwave.

In both cases, Texas Instruments is the market leader, and the company has an ironclad competitive advantage that should keep it on top of the industry.

Texas Instruments manufactures the majority of its own chips, giving it more control over its supply chain than most rivals. The company also owns four 300-millimeter wafer fabrication facilities, while most competitors rely on a 200-millimeter process. What's the difference? Chips built on a 300-millimeter wafer cost about 40% less, meaning Texas Instruments has a significant cost advantage. 

Also noteworthy is that the company has a broad portfolio of products with use cases across numerous industries, from the industrial and automotive sectors to personal electronics and communications. In fact, Texas Instruments makes 80,000 different products for over 100,000 different customers worldwide. That diversity helps it navigate the natural cyclicality of the semiconductor industry.

Collectively, these advantages have powered a solid financial performance over the last five years.

Metric

Q2 2016 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$12.9 billion

$16.8 billion

5%

Free cash flow

$4.1 billion

$6.5 billion

10%

Data source: YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Going forward, Texas Instruments is well positioned to maintain this momentum. The analog chip market is expected to grow at 6.3% per year through 2026, surpassing $97 billion, according to MarketWatch. And the embedded processor market is expected to grow at 5.3% per year through 2027, reaching $29 billion. Taken together, this means the company has a strong competitive advantage and that its addressable market is getting bigger. That's why I think this tech stock will continue to outperform the market.

The case for dividend growth

Since 2004, Texas Instruments has raised its dividend by 26% per year, and the company recently bumped the quarterly payout up to $1.15. That means shareholders will earn $4.60 per share over the next year. In other words, $106,000 invested in Texas Instruments today would buy 544 shares, which in turn would net $2,500 in annual dividends. That's not bad, but that figure could get much larger.

For instance, if the dividend grows at a reasonable 10% per year over the next decade, the annual payout would reach $11.93 per share. And with 544 shares in your portfolio, you would earn nearly $6,500 in annual dividends 2031. Of course, if Texas Instruments continues to grow its dividend at 26% per year, the payout would exceed $25,000 -- but that's probably not realistic.

As a caveat, investors should pay attention to free cash flow. If that figure decelerates, Texas Instruments may be unable to raise the dividend -- or worse, it may have to cut it. But as things currently stand, free cash flow is growing steadily, and the dividend payout ratio sits at just 54%, meaning shareholders have every reason to expect those quarterly payments to rise over time.

That's why this stock looks like a smart long-term investment -- even if you don't have $106,000. 

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Texas Instruments. The Motley Fool has a disclosure policy.

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