The Federal Reserve is proving very serious in its attempts to slow inflation, and investors are feeling the pain. On Sept. 13, the Bureau of Labor Statistics (BLS) reported inflation of 8.3% in July, slightly down from June, but still at the highest levels Americans have faced in four decades. As a result, the Federal Reserve is expected to raise interest rates again when it meets on September 20-21. Since the BLS dropped the July inflation data, stock market indexes are down 5% or more, as rising rates mean more yield from bonds, making stocks less attractive at higher valuations.
What's an investor to do? One way to help bolster your returns is to buy the best high-yield dividend stocks, especially companies with a long track record of raising their payouts. Sure, you still have to deal with short-term volatility, but those regular paychecks make it easier to ride out choppiness, and over the long term, dividend increases offset rising rates and inflation, and help create meaningful wealth you can count on.
One of my top dividend stocks to buy right now is Texas Instruments (TXN 0.12%). With 14 dividend increases since 2010, it has a long record of financial strength and rewarding investors, and its future looks just as bright.
Why investors are worried about semiconductor stocks
You may be wondering how a semiconductor company could help investors sleep at night; after all, this is a tough time for the industry. The past few years were very good for investors, with massive demand for chips leading to record sales and profits. More recently, supply shortages have been a challenge, and companies have committed to spending hundreds of billions of dollars in capital expansion projects.
But over the past few quarters, demand has weakened. Rising inflation is weighing on the global economy, and much of the demand that was pent up during the coronavirus pandemic has eased. So now, a lot of chip companies are facing weakening demand, while still having plans to spend billions on new production capacity in the coming years. With weakening sales and rising interest rates, companies may have to rely on more high-interest debt to fund those projects. And that could weigh on future returns for investors.
But that's a short-term (and short-sighted) way to think about it
Sure, the semiconductor industry is both capital intensive and cyclical. This is particularly true for the most cutting-edge digital chips, which have a shelf life of about a year before the next newest, fastest chips are developed and brought to market. This requires the foundry operators, like Samsung, Taiwan Semiconductor, and Intel to continually invest new money to improve their fabrication capabilities. And that can result in them having big capital commitments at the same time that demand is weakening. And this is likely part of the reason why Intel just partnered with Brookfield Infrastructure to fund construction of two new factories.
The point? This cyclical nature isn't surprising or new to the industry. And while it can be a risk, it's also an opportunity for patient, long-term-focused investors.
NASDAQ: TXN
Key Data Points
Which brings me back to why Texas Instruments is different
Unlike its digital semiconductor peers, Texas Instruments specializes in analog chips. While maybe not as exciting as the cutting-edge processors rolling out of Taiwan Semi's factories, those analog chips are incredibly important. Need to get power to a digital semiconductor? You need an analog chip. Want to get sound or video out of it? Analog chips once again. In short, analog semiconductors are how digital semiconductors interface with the real -- analog -- world.
Even better, the applications for many of its chips are broad and stable, and it's far more important that a chip work reliably and be available for many years than being the most cutting-edge. For example, the average car on U.S. highways is more than a decade old; older cars rely on the analog semiconductors that do so many things in modern automobiles, so they must be available for many years. As a result, Texas Instruments has been manufacturing some of the exact same semiconductors for more than a decade. Talk about delivering an incredible return on the capital it spends to build those foundries.
Here's why it's a buy right now
As a result of its focus on this boring, ultra-important segment of the chip industry, Texas Instruments has been able to build out some amazing economic moats. It has cost advantages from its 300-millimeter wafer production, resulting in ultra-low manufacturing costs. It has network effect benefits, with 80,000 products and over 100,000 customers across multiple industries. The more customer applications it can meet, and the more customers work with it, the more products it can develop that meet the needs of more customers.
Combine these competitive advantages with the growing demand for semiconductors globally, and Texas Instruments is positioned to continue its incredible multidecade run of shareholder returns. Since 2004, it has increased cash flow per share 12% per year on average, increased the dividend 18 straight years, and repurchased almost half of shares outstanding. Investors have enjoyed an amazing 716% in total returns over that period.
TXN Total Return Level data by YCharts
At recent prices, Texas Instruments' dividend yield has been pushed up to nearly 3%, well above the average yield over the past decade. The company has a long record of strong financial results, strong economic moats, and big tailwinds in its favor, and investors worried about rising interest rates should take advantage of the recent sell-off and add Texas Instruments to their portfolios.
