The tech industry is generally not regarded as a place to find dividends, let alone rapid dividend growth. However, as many tech companies mature, they elect to offer payouts and, in a few cases, increase them at a rapid rate.
These huge increases appeal to more investors as 8.3% year-over-year inflation has hurt many on a fixed income. Also, many stocks offer payouts well above the average S&P 500 dividend yield of about 1.6%. Investors looking for such dividend stocks should consider Broadcom (AVGO -4.31%), Digital Realty Trust (DLR 0.12%), and Texas Instruments (TXN -2.44%). Let's find out a bit more about these three hypergrowth dividend stocks.
1. A cash-cow stock with tons of dividend growth firepower
Justin Pope (Broadcom): Connectivity is a popular investment theme on Wall Street, and for a good reason. The world is increasingly digital. Various technologies, including streaming, the Internet of Things, gaming, and autonomous driving, rely on sending data from one location to another. Broadcom specializes in semiconductor solutions for connectivity and networking applications. You'll find its products in devices including consumer electronics, routers, automated factory equipment, Bluetooth devices, data centers, and more.
The company is growing and very profitable; Broadcom's grown its revenue by an annual average of nearly 30% over the past decade, partially aided by the immense growth of smartphones worldwide. Additionally, the business generates almost $0.49 of free cash flow from every revenue dollar, giving the company billions in cash to spend each year.
AVGO Revenue (TTM) data by YCharts
Sharing those profits with shareholders through a dividend has become routine for Broadcom; management raised its dividend annually for 13 consecutive years, putting it on the path to becoming a Dividend Aristocrat. The dividend yields a solid 3.3% at the current share price, but the payout's rapid growth is what's most impressive. Shareholders have received annual raises averaging 18% over the past three years, outpacing even the hot inflation rates of today. The dividend payout ratio is quite manageable at 44%, leaving room for Broadcom to remain financially flexible.
Broadcom is trying to diversify its business by getting into software. It acquired Symantec in 2018 and CA Technologies in 2019 to form its infrastructure software division, which now makes up about a quarter of Broadcom's total sales. These two deals totaled almost $30 billion in value, but there are more deals to come. The company has a pending agreement to acquire cloud software company VMware for $61 billion in cash and stock.
Investors will want to monitor the developments of Broadcom's pending acquisition and follow the company's financial performance. Significant purchases take time to digest properly, and large deals don't always help a company. However, Broadcom's juicy and growing dividend is well funded by cash profits, and a successful acquisition could strengthen the business over the long term.
2. Digital Realty has delivered steady dividend increases for over a decade
Jake Lerch (Digital Realty Trust): If you're looking for a tech-focused company delivering consistent dividend growth, Digital Realty Trust is a name you should know. The real estate investment trust (REIT) develops properties for use as data centers, then leases space to customers. Data centers are, in effect, the warehouses that store the world's electronic data. With the rise of cloud computing, the demand for data centers has skyrocketed.
And as demand for its properties increased, Digital Realty passed along steady cash returns to shareholders. The company increased its annual dividend for more than 10 years straight. Its current dividend yield stands at 4.06%.
Yet there are risks for Digital Realty. The first is a common one for REITs: rising interest rates. As interest rates rise, REITs lose some appeal, as investors can easily swap into risk-free government notes or bonds and capture similar (or even higher) amounts of income. Moreover, REITs run the risk of having to refinance their (typically high) debt loads at higher interest rates -- which can eat away at profit margins and potentially threaten dividend payouts.
The second risk is that cloud companies may choose to build and operate their own data centers -- cutting Digital Realty out of the process altogether. That's the position held by Jim Chanos, one of the world's most prominent short-sellers. Chanos is betting against Digital Reality, arguing that some of its biggest customers (Alphabet, Microsoft, Amazon) will eventually turn against it. So far, the bet seems to be paying off. Digital Realty's stock price is down 33% year to date.
High inflation, combined with rising interest rates, will keep shares under pressure in the short term. However, longer-term investors might find Digital Realty's steady dividend income too good to resist, mainly if you believe that the cloud revolution is only getting started.
3. The old-line chip company at the center of new tech
Will Healy (Texas Instruments): Texas Instruments declared its first dividend in 1962, but it took 42 years before it set out on its current dividend growth path. TI paid less than $0.09 per share in dividends when Rich Templeton became CEO in 2004. After becoming company head, Templeton put his company on a path of annual dividend hikes. So significant were the increases that its dividend increased at a compound annual growth rate of 25% between 2004 and 2021.
TI has just approved its latest increase, which is a more modest 8%. Still, today's dividend amounts to $4.96 per share annually, yielding about 3%. Its 2021 dividend claimed 62% of the company's free cash flow. This has left the company with enough cash to hike dividends, buy back shares, or invest in its business.
TI supports this dividend by designing and building analog and embedded semiconductor chips. Since the latest digital chips cannot function without TI's analog chips, this virtually ensures a long-term book of business for the semiconductor stock.
About 62% of its revenue comes from the industrial and automotive sectors. Also, its chips are an essential component of Apple's iPhone, and analysts widely believe the client that provides 9% of TI's revenue is Apple. In total, TI makes about 80,000 products that serve 100,000 customers.
Those customers took revenue to $10.1 billion in the first half of 2022, 14% higher than in the same time frame in 2021. Net income rose 22% in that period to $4.5 billion as TI limited its cost of revenue growth to 2% during that time.
TI's stock price has fallen 17.2% over the last year, slightly lagging the S&P 500, which fell 14.1%. Still, it has sidestepped the massive drop of other tech stocks. Moreover, the falling stock price means investors can buy this growing dividend payer at 17.9 times earnings. That low valuation, along with TI's critical role in tech, should keep its dividend growth on a sustainable path.
