Dividends are a feather pillow and a warm blanket to help us sleep as the market rages outside. Collecting dividends means profits don't depend on the latest Federal Reserve meeting or speech by Fed Chairman Jerome Powell. These short-term market events will probably seem like ancient history by 2024 anyway. A steady income stream is essential to new investors building a portfolio, to retirees, and to everyone in between.
For some investors, this is their first chance to wrestle with a bear market, while investing veterans have seen several. There is no need to fear a bear market; a down market means snagging higher yields. Combining rising dividends with secular growth stocks is the best of both worlds.
Think outside the box
When you think of semiconductor (or "chip") stocks, popular stocks Nvidia and Advanced Micro Devices probably come to mind. These are terrific companies, but the volatile stocks offer little or no yield. Down cycles make for rough sledding.
Texas Instruments (TXN 0.25%) and Analog Devices (ADI 0.73%) don't get the press, but long-term investors bank steady profits. Texas Instruments and Analog Devices have given shareholders a dividend raise every year since 2004 (yes, even during the Great Recession).
The yields are historically high -- pandemic aside -- because of the market downturn.
ADI Dividend Yield data by YCharts
Let's look a little deeper.
Texas Instruments is a cash machine
Texas Instruments has a broad portfolio of products with over 80,000 stock keeping units (SKUs). Revenues are less volatile than those of many competitors because its customers span several sectors, with industrials leading the way at 41% of sales. Texas Instruments is the leading player in the $74 billion analog market.
Cash management is the cornerstone of management's philosophy. The company has raised the dividend for 18 consecutive years at a compound annual growth rate (CAGR) of 25%. It has also reduced the share count by 46% by buying back stock. Texas Instruments can do this because free cash flow has grown 12% per share since 2004.
The company continued the tradition with an 8% dividend increase and an additional $15 billion (more than 10% of the market cap) authorized for share buybacks.
This long-term execution is fantastic, and investors can snag a higher-than-normal yield while the market is down.
Analog Devices is future-driven
Chipmakers relying on electronic consumer sales tend to be highly cyclical and sensitive to recessions. So are companies that rely on a few big customers for most of their sales. Analog Devices has 125,000 customers for its 75,000 SKUs, and only 15% rely on consumers.
Analog semiconductors take real-world phenomena like temperature, motion, and sound and translate the data into digital signals. Digital X-rays provide significantly higher image quality than traditional field X-rays. Higher-definition images allow doctors to catch and treat serious illnesses, like breast cancer, earlier. Analog semiconductors make this possible. Analog Devices's products are used in several growth industries, like digital healthcare, automotive technology and autonomous vehicles, industrial automation, and clean energy.
Analog Devices raised its dividend since 2004, the payout rising from just $0.04 per share quarterly to $0.76.
ADI Dividend data by YCharts
Analog Devices produced record sales, operating cash flow, and free cash flow in fiscal 2022's third quarter. Sales for the quarter reached $3.1 billion -- 77% higher than last year -- thanks in part to the blockbuster acquisition of Maxim Integrated Products in an all-stock deal that valued Maxim at $21 billion and the combined enterprise at $68 billion. The deal closed in August 2021, boosting Analog Devices' presence in the expanding automotive and 5G markets.
Analog Devices' model calls for 100% of free cash flow to be returned to shareholders through share repurchases and dividends. Eight percent of the market cap -- or $5.9 billion -- has been paid out over the past 12 months alone.
Semiconductors are critical to the technology of today and of the future. This means tremendous growth potential. Dividends are cornerstones of profitable long-term portfolios. With Texas Instruments and Analog Devices, investors capture the best of both worlds.
