Broadcom (AVGO -1.27%) has achieved both market success and stock price growth in the semiconductor industry. As a tech stock, it operates in an industry not known for high dividends.
But upon closer examination, it has also served dividend investors well, particularly its long-term stockholders. Investors who want to better understand Broadcom's payout should focus on the three reasons it has become an outstanding dividend stock.
1. Broadcom's businesses
Broadcom's stock contends with a disadvantage from a recognition standpoint. Since it is not as customer-facing as an AMD or an Nvidia, investors might not watch it as closely.
However, Broadcom's technology touches consumers in an indirect sense. It spends about $5 billion per year on research and development and employs engineers located near its most crucial clients' facilities. This has led to product advances such as Wi-Fi 6, dramatically improving Wi-Fi service. It has also led the way in turning mobile devices into hot spots themselves.
Additionally, Broadcom has built an infrastructure software business through the acquisitions of CA Technologies and the Symantec enterprise security business. This software has helped companies improve security and add efficiencies to their operations.
As a result, in the first three quarters of 2021, Broadcom derived $4.7 billion in net income from $20 billion in revenue. Not only did this increase profits by 190% versus the same period in 2020, but it also raised free cash flow to $9.9 billion during that time. From that cash flow, Broadcom easily covered almost $4.7 billion in dividend costs during the first nine months of this year.
2. The dividend yield
That outlay funds a current annual dividend of $14.40 per share, or $3.60 per quarter, which works out to a cash yield of approximately 2.5%. Shareholders appreciate that the payout is around double the average S&P 500 dividend yield of about 1.25%. They may also see that yield increase again soon, since the company has announced payout hikes in early December in the last few years. However, it falls short of fully covering the 4% to 5% withdrawal rate that investment professionals recommend for retirees living off their assets.
Still, the growth rate of the dividend offers hope to income investors. Broadcom has increased the payout every year since introducing a dividend in 2010. At that time, the quarterly payout stood at just $0.07 per share.
The dividend has experienced double-digit percentage increases every year since its introduction. Although it increased by only 11% with the last payout hike, it has risen more than 51-fold since 2010.
3. Broadcom's stock price growth
The increases in Broadcom's share price over time might reassure investors even more. Many dividend aristocrats that continue to pay investors well with dividends for decades tend to lag the S&P 500 in stock price growth.
Broadcom would have to continue its streak for 14 more years to reach aristocrat status. Nonetheless, since its IPO in August 2009 under its previous name, Avago Technologies, it has delivered almost seven times the growth of the S&P 500.
Moreover, investors who bought at the $15 IPO price and still hold the stock now earn an effective annual dividend return of 96% without selling a single share. That payout does not include the 38-fold increase in the stock price over that time, making Broadcom a highly profitable growth-and-income stock for its original long-term owners.
The Broadcom dividend value proposition
Admittedly, due to its 2.5% cash return for new investors, stockholders will more likely focus on the stock price growth than the payout. However, with a history of double-digit dividend growth, Broadcom should serve investors well over time. Furthermore, between the historical stock and dividend returns and the company's current product lines, investors have many good reasons to buy and hold for the next decade, or perhaps longer.