Numerous studies suggest that dividend stocks tend to outperform their nondividend-paying peers, especially those that raise their dividends regularly. The reason for that outperformance is relatively simple: If a company consistently generates enough cash to pay shareholders, the underlying business is probably very healthy.
With that in mind, Texas Instruments (TXN +3.01%) and American Tower (AMT +2.26%) boast dividend yields of 2.63% and 2.02% respectively, which puts them both above the S&P 500 average of 1.37%. That means an investment of $45,000 split evenly across both stocks would generate more than $1,000 in passive income each year. Better yet, investors have good reason to anticipate long-term price appreciation as well.
Here's what you should know.
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NASDAQ: TXN
Key Data Points
1. Texas Instruments
Texas Instruments is an often-overlooked semiconductor company that primarily competes in two markets: analog chips and embedded processors. The former are used in every electronic device, while the latter are used in most, meaning demand is widespread across the automotive, industrial, and consumer electronics industries. Better yet, Texas Instruments is the top player in both markets, and shareholders have good reason to believe the company can defend its leadership position for years to come.
Specifically, Texas Instruments handles most manufacturing, assembly, and testing internally, allowing it to control its supply chains and inventory more than many of its peers can. Perhaps more importantly, it currently has two fabrication facilities that build chips on 300-millimeter wafers, while most rivals use a 200-millimeter process.
Why does that matter? Chips built on 300-millimeter wafers cost about 40% less. With that in mind, Texas Instruments is currently constructing three more 300-millimeter facilities, one of which will be operational later this year, and the company plans to reach eight facilities in the long term.
Thanks to its industry-leading position, Texas Instruments has delivered respectable financial results on a consistent basis. In the past year, revenue rose 23% to $19 billion, and the company generated $6.5 billion in free cash flow. That equates to a monster free cash flow margin of 34%. Shareholders should continue to look for more of the same, as the company is well positioned to benefit from the proliferation of electronic devices.
Not surprisingly, Texas Instruments has been a rewarding investment. The stock is up 494% over the past decade, and the company has raised its dividend at a pace of 25% per year since 2004. The quarterly payout currently sits at $1.15, but if the company continues to execute, that figure should continue to grow in the future. In fact, I wouldn't be surprised to see Texas Instruments join the ranks of the Dividend Aristocrats. That's why this growth stock is worth buying.
NYSE: AMT
Key Data Points
2. American Tower
American Tower is a real estate investment trust (REIT). Its leading portfolio of telecom tower sites includes 43,000 properties in the U.S. and Canada and 177,000 properties in international markets. The company generates revenue primarily by leasing tower space to wireless service providers such as Verizon, though it also works with radio and television broadcasting companies and other tenants.
American Tower's business model is compelling for a few reasons. First, its leases feature contractual price increases, meaning the rent goes up on a regular basis. Second, the company benefits from significant operating leverage, because it costs very little to add a new tenant or more equipment to an existing tower. Put another way, the operating margin on each tower improves with each additional tenant.
As a result, American Tower has delivered strong, consistent financial results. Revenue climbed 20% to $9.9 billion in the past year, fueled by impressive growth in Latin America and Europe, and funds from operations soared 36% to $5.5 billion.
Looking ahead, American Tower still has plenty of room to grow. The number of connected devices -- think smartphones and Internet of Things devices -- is growing rapidly, which is driving demand for wireless coverage and capacity around the world. To address that, carriers are densifying 4G networks and deploying 5G networks in mature markets, and they are also rolling out 4G technology in emerging markets.
American Tower may not be the most exciting business, but it is a leader in a critical industry and has been a rewarding long-term investment. The stock is up 304% over the past decade, and the dividend has grown at 20% per year over the same period. The quarterly payout currently sits $1.40 per share, but management hopes to boost that by 12.5% this year, and investors have good reason to believe that trend will continue. That's why this stock is a buy.
