Broadcom (AVGO -4.31%) has emerged as one of the more notable dividend stocks in the tech industry. While not the highest-yielding dividend stock, it stands out due to its dividend growth.
Like most other tech stocks, it has dropped significantly in the Nasdaq bear market. Still, that decline increases the dividend yield while discounting the valuation. Given such conditions, investors should consider taking a closer look at Broadcom's value proposition.
The Broadcom dividend
Broadcom pays shareholders $16.40 per share every year. At a price in the $525 per share range, it produces a return of 3.1%. While that is almost double the current 1.6% dividend yield of the S&P 500, numerous dividend stocks offer higher cash yields.
The company paid its first quarterly dividend of just $0.07 per share in December 2010. However, the dividend hikes began the next quarter, and on an annual basis, the increases came at double-digit rates. This has led to a payout growth rate far exceeding some of the other dividend stocks in tech, such as Texas Instruments or IBM.
AVGO Dividend data by YCharts.
Moreover, Broadcom, then known as Avago Technologies, launched its IPO in August 2009. Since it fell to a low of just over $14 per share in 2009, those who bought at that time and held have earned an annual return greater than their original investment in dividends alone.
The stock price has also increased significantly over that time frame. Broadcom has fallen into bear market territory this year, but thanks to the lower stock price, its P/E ratio is at 26, near three-year lows.
Broadcom's financials and business
Broadcom cannot guarantee that it will keep pace with past growth. However, the company continues on an upward trajectory.
In the first half of fiscal 2022 (which ended May 1), revenue came in at $15.8 billion, rising 19% compared with the first two quarters of 2021. This helped produce a net income of $4.9 billion for the first two quarters of 2022, rising 81% compared to the same period in 2021. Slower growth in the cost of revenue and operating expenses helped to boost income.
This led to a free cash flow of more than $7.5 billion in the first half of 2022. During that period, Broadcom paid $3.5 billion in dividend expenses. Since its payout claims less than 47% of its free cash flow, the company can not only sustain its dividend but also afford to continue annual increases.
Broadcom derives these cash flows from two business segments, semiconductor solutions and infrastructure software. The company works with large clients to create specialty semiconductors that meet their needs. Also, its software business provides enterprise management and security software to help enterprises manage businesses and IT systems.
Moreover, that software business should also grow, assuming it closes its proposed merger with VMWare. Infrastructure software made up only 23% of Broadcom's revenue in Q2. Nonetheless, since VMWare reported $6.6 billion in revenue in its last two quarters, that segment will probably make up just over 45% of revenue. That breakdown should help even out the cyclicality that sometimes characterizes its traditional semiconductor business.
Broadcom as a dividend stock
Broadcom does not offer the highest-paying dividend. However, it has become one of the more notable high-yield tech stocks due to its huge payout hikes. Additionally, it has created a highly successful niche in the semiconductor business, and with the addition of VMWare, it will derive considerable revenues from software. These business lines will likely sustain a dividend that should continue to surge higher over time.
