Investors love dividends. Who doesn't enjoy getting paid to own something while you do nothing? They are also popular among retirees, providing a steady income stream without the need to sell assets.
While eye-popping 6% or higher dividend yields are tempting, they are usually indicative of a struggling company that may have problems maintaining its current dividend level in the future. Investors should look for stocks paying between a 2% and 4% yield, as this level is likely sustainable. One stock that meets these criteria is Texas Instruments (TXN +0.31%), one of the most solid dividend payers in the market.
With an annual payout of $4.60 per share, it takes 1,087 shares of Texas Instruments to receive $5,000 in dividends. So is Texas Instruments worth investing that much money in in today's market?
A simple but vital product line
Even if you've never heard of the chip shortage, it has likely affected you. Whether it's a car, phone, or a vacuum, chances are the device has a Texas Instruments product in it. Texas Instruments doesn't produce the most potent or cutting-edge chips; instead, it focuses on analog and embedded semiconductors that perform basic operations. This chip category is vital to essential electronic functions and won't become obsolete anytime soon.
In investing, you sometimes don't have to purchase companies that are on the cutting edge; instead, you can focus on legacy players that excel in their industry. That's what you get by investing in Texas Instruments.
The chip shortage has affected every segment of the economy. To combat this, Texas Instruments will invest $3.5 billion annually in the U.S. to grow its chip manufacturing capabilities through 2025. From 2026 to 2030, its investments will total around 10% of annual revenue. That's a massive investment in domestic chip production. But how will shareholders fare?
Image source: Texas Instruments. Photo of executives breaking ground at a new semiconductor plant in Sherman, Texas.
Consistent dividend growth
If companies paid out all of their profits to shareholders, there'd be no capital left over to invest in the business. Instead, Texas Instruments is purchasing future revenue growth by investing in its production capacity. The company estimated its total investments will drive 7% annual revenue growth from 2030 into the future.
This sales growth will be critical to Texas Instruments' future dividend increases. Texas Instruments is not a dividend aristocrat, meaning a company that has paid and hiked its dividend every year for 25 years -- it's only at year 18 of dividend increases. But it has consistently paid a dividend since 1962. Furthermore, it has grown its dividend at a 25% average annual growth rate since 2004. In 2021, Texas Instruments raised its dividend by 13% while only paying out 62% of free cash flow.
NASDAQ: TXN
Key Data Points
While these are nifty stats, what do they mean for investors? First, its payout is sustainable. Because Texas Instruments isn't funneling all of its leftover cash into dividends, it can spend its cash on other items, like building new factories. Second, dividend growth is a secret weapon for long-term investors.
Say you'd purchase a single share of Texas Instruments stock with a $4.60 per share annual dividend. If Texas Instruments grows its dividend by 10% annually, in 10 years that dividend will have grown to $11.93 per share. If you've held on for a decade, your initial investment no longer pays a 2.85% yield; instead, it would pay a 7.4% yield on your initial investment.
Granted, these are hypothetical future numbers, but Texas Instruments is a company primed to deliver these results. Its sales growth for the first quarter was a respectable 14%, but its net income grew even faster at a 26% pace. However, Texas Instruments gave a bleak outlook, giving a wide Q2 revenue range ($4.2 to $4.8 billion) due to COVID-19 restrictions in China. Depending on how the company executes, this could result in a revenue decline compared to 2021's Q2 sales of $4.58 billion. This pessimism is reflected in the company's valuation.
TXN PE Ratio data by YCharts
At 18 times earnings, Texas Instruments is nearing a low reached only a few times in the past decade. This valuation makes the stock relatively cheap, and investors shouldn't worry too much about the valuation.
While some are worried about a recession, Texas Instruments investors should rest easy. Because of chip shortages, Texas Instruments' products are in high demand. Therefore, any demand reduction from consumers not spending as much in a recession will allow Texas Instruments to return to normal operating conditions.
Texas Instruments is an excellent buy for those looking for a solid dividend payer. Demand for its products isn't going away, and future growth should make this a superb addition to investors' portfolios.
