Buying the dip has stopped working this year for shareholders of Universal Display (OLED 1.98%). In fact, the products and processes provider for OLED screen manufacturing has fallen below where it was in March 2020 (when pandemic lockdowns began) and has reset all the way back to levels not seen since early 2019. Blame a slowing global economy and higher interest rates, which lower the present value of stocks.  

But many investors might be overlooking Universal Display's potential, especially as an income-generating dividend stock. In fact, while the current dividend yield might not look like much, this company has a strong track record so far in doling out dividend pay increases over the last few years. Is Universal Display worth buying for that dividend right now?

Bad news for the display market

The bear market caused by economic uncertainty this year isn't just negatively impacting Universal Display's stock price. After a two-year run in strong consumer electronics spending, a decline in smartphone sales is expected in the second half of this year. Ongoing pandemic lockdowns in China are also reducing end-user demand for electronic devices. Plus, supply chain issues around the world are affecting orders for OLED materials. The company reported a slowdown in expected sales last quarter, lowering its full-year revenue outlook to $600 million (from $625 million to $650 million).

Granted, if Universal Display does haul in $600 million in revenue this year, that would still represent an 8% increase over 2021 and a 48% increase over 2019. However, since the company last provided a financial update, the global economic picture has gotten a bit worse. Many worry a recession is imminent given the U.S. Federal Reserve's aggressive interest rate hikes. If holiday shopping season sales of consumer devices disappoints, this pain for Universal Display could spill over into 2023.

The upshot here is that even in a bad year, this is a highly profitable business in the tech manufacturing industry. Universal Display tends to generate operating profit margins in the 30% range. 

OLED Operating Margin (TTM) Chart

Data by YCharts.

Playing the long game with OLED

Of course, even lofty profit margins won't save the stock in the near term if the economy keeps heading south. As of this writing, Universal Display trades for just under 23 times enterprise value to free cash flow. It isn't a ludicrous valuation, but it isn't cheap either if a recession is coming.  

But I believe Universal Display has a lot going for it that makes it a buy for investors seeking dividend growth. The company has a stellar balance sheet with $653 million in cash and short-term investments and no debt. And even should profits take a big hit, the current dividend payout only cost the company $28 million through the first half of 2022 -- compared to free cash flow generated of $65 million

Speaking of that dividend, Universal Display has increased it every year since it was initiated back in 2017, going from $0.03 per share each quarter to $0.30 today. Talk about a pay raise. Currently, the stock yields a modest 1.2%, but there's ample room for growth considering the free cash flow Universal Display is generating.

Given the gloomy outlook, what could help drive that payout higher in the coming years? OLED screens are already an integral part of the smartphone industry, but they're only just beginning to scratch the surface of the TV, laptop, and PC display markets. Besides representing a lot of new devices that could feature a high-end OLED screen, the surface area of these products is far larger than that of a smartphone. That would equal lots of new material sales for Universal Display, not to mention more licenses for its manufacturing technology.

All of that adds up to a growth and dividend income stock that has lots of room to steadily increase its payout over time. A rising dividend can be a powerful investment over the long term. It could be a bumpy road over the next couple of quarters, but the long-term potential for Universal Display looks underappreciated right now. This could be a compelling dividend stock worth buying right now, especially if you plan on reinvesting those dividends for at least a few years.