The Nasdaq 100 (QQQ -0.48%) is one of the most closely followed market indexes in the United States. Tracking the returns of the 100 largest companies traded on the Nasdaq exchange, this technology-focused index has put up phenomenal growth for shareholders over the last decade-plus. If there is one thing the index is lacking, it is dividend payers, with its current yield at a paltry 0.7%.
There are a few Nasdaq 100 stocks that pay a dividend, one of which is Texas Instruments (TXN 0.25%), a company with a high dividend yield and a fantastic history of growing its dividend per share. Here's why I think the semiconductor manufacturer is a perfect stock for technology investors looking for steady income growth.
Strong track record of dividend growth
What's the first thing you should do when trying to find dividend growers? Look at companies that have consistently increased their dividends in the past. Texas Instruments (TI) passes this test with flying colors.
From 2004 to 2022, the company grew its dividend per share every year, bringing it from $0.09 in 2004 to $4.69 in 2022. Over the last 10 years, its dividend per share has grown at a compound annual growth rate (CAGR) of 21%, making it one of the fastest dividend growers in the world.
Data by YCharts.
At its latest investor day, management stated that it wants to continue this dividend policy over the long term with the goal of providing "a sustainable and growing dividend to appeal to a broader set of owners" according to its investor deck. Management wants to pay 40% to 80% of its annual free cash flow each year out as dividends, which means that as cash flow grows, so will dividend payouts.
But the key question is: Will TI continue to grow its cash flow in the future? I think it can.
Future growth will come from industrial and automotive
Over the last 10 years or so, TI has benefited from two secular tailwinds. One is the increased digitization of the industrial sector, and the other is the transition of the automotive sector to electric vehicles. Both industries are seeing increasing needs for computerized components, which is what TI specializes in. The proof is in the financial results with both segments combining for 65% of TI's overall revenue in 2022 versus just 42% in 2013.
Management believes these tailwinds will continue this decade, which is why it is planning on increasing its capital expenditures to $5 billion a year from 2023 to 2026. For reference, over the last 12 months, TI's capital expenditures were just under $3 billion.
Over the long term, this increased manufacturing capacity should lead to steady revenue and cash flow growth, thereby giving the company the financial capacity to increase its dividend payouts to shareholders.
The stock is not expensive today
Wall Street has started to have short-term concerns around the semiconductor industry, which has caused stocks like TI to dip lower. At $175 per share as of this writing, TI has been trading below its all-time high of $202 per share for a while, providing long-term investors with a potential buying opportunity. The stock currently has a price-to-earnings ratio (P/E) of 18.7, which is below the market average. Its current dividend yield is also around 2.8%, above the market average.
Data by YCharts.
I don't think anyone could argue that TI stock is dirt cheap at these levels. But with a solid dividend yield and a fantastic opportunity to grow its dividend payouts each year, this is a great stock to buy for income-focused investors.
