Some of the best dividend stocks don't just offer a high annual yield. The best income-generating businesses have a knack for doling out rising dividends over time -- a key ingredient for stock market-beating returns, and more importantly, for helping investors reach future financial goals.
The world of tech isn't often looked to for dividend stocks, but perhaps it should be. Semiconductor businesses in particular have been growing for decades, and leaders in this space have been raising their shareholder payouts along the way. If you're looking for dividend stocks to buy in May, three Fool.com contributors think Qualcomm (QCOM 1.45%), NXP Semiconductors (NXPI 1.94%), and Microchip Technology (MCHP 1.51%) are worth a serious look.
1. Qualcomm: A highly profitable company, even in a nasty smartphone downturn
Nicholas Rossolillo (Qualcomm): Mobile chip specialist Qualcomm is in the midst of a deep downturn in the smartphone market (specifically Android phones) that began the second half of 2022. The market for mobile chips isn't going to improve just yet, either.
After reporting a 17% year-over-year decline in revenue for its quarter ended in March, Qualcomm management predicted a 22% year-over-year drop in sales for the quarter that will end in June. Improvement in these year-over-year declines isn't expected for at least another two quarters as Android phone demand remains sluggish.
I haven't painted a very rosy picture, but I can find lots of silver lining here. First, while Qualcomm is reporting these nasty dips in sales, it's worth considering the positive progress the company is still holding on to from the last few years -- helped by early 5G mobile networks and the first wave of mobile phone upgrades they spawned.
Data by YCharts.
Second, though smartphones aren't the high-growth industry they were in the 2000s and 2010s, Qualcomm is leveraging its expertise in mobility and rapidly expanding to meet the needs of a new secular growth trend: auto technology. In fact, amid its smartphone slump, Qualcomm has continued to post very healthy growth from its automotive customers.
Auto chip sales grew 20% year over year in the March-ended quarter to a modest $447 million. Qualcomm is trying to accelerate this segment, and just announced the acquisition of Israeli start-up Autotalks, which designs "vehicle-to-everything" communications chips for driver safety and self-driving car capabilities.
And third, Qualcomm is able to go out and make acquisitions like this even in a downturn because the company is highly profitable. This is an important point for dividend investors, as stable and growing dividend payments require a business to remain free-cash-flow-positive in good times and bad. Qualcomm delivers on this front. To wit, despite the double-digit percentage decline in revenue through the first half of its current fiscal year, Qualcomm's free cash flow held steady with last year, coming in at a healthy $3.7 billion (or 20% of revenue).
Year to date, Qualcomm has returned all of that free cash flow to shareholders via a dividend payment (slightly higher than last year's quarterly payout, and currently touting an annualized yield of 3%) and share buybacks. While investors wait for the eventual rebound in Android smartphones, Qualcomm continues doling out the cash. Shares look like a long-term value at just over 11 times trailing-12-month earnings right now.
2. NXP Semiconductors: A Dutch dividend dynamo defying downturns
Anders Bylund (NXP Semiconductors): In the quest for the best dividend-paying semiconductor stocks, NXP Semiconductors looks like a serious contender. This Dutch company is gracefully defying the cyclical downturn while rewarding investors with robust dividends.
NXP's first-quarter results may not have shown any top-line growth, but the company still managed to outpace Wall Street's even lower expectations. As the company works its way through the global downturn in consumer-facing businesses, NXP's leadership in the automotive and industrial sectors keeps the engines running. These essential target markets should deliver plenty of order growth in the years ahead.
With a healthy dividend yield of 2.5%, this stock is poised to put a smile on any dividend lover's face. And that's not all. NXP's first-quarter cash flow from operations of $632 million and cash dividends payout of $219 million is music to the ears of any serious income investor. The payouts are more than fully backed by incoming cash profits, with plenty of room for future dividend increases.
Those mixed results are the product of a limiting economy, as consumers and corporations around the world are looking for the end of this inflation-based downturn. NXP's management sees light at the end of the tunnel amid the cyclical downswing. The company's cautious optimism is fueled by strong sales in its automotive and industrial businesses. These sectors are the key to NXP's ability to sail through these stormy waters and look like a long-term winner on the other side.
NXP's most substantial segment, automotive computing products, made up 59% of the first quarter's total sales. This division saw an impressive 17% year-over-year revenue boost, signaling a broad market recovery in the car-making industry. As smart connected devices, smart factories and homes, smart connected cars, and data-center servers keep driving semiconductor growth, NXP has a finger in many different pies and stands to benefit from these expanding secular trends.
In a nutshell, NXP Semiconductors' sector-spanning diversification and resolute focus on healthy dividend growth make it a must-watch stock for income investors today.
3. Microchip Technology: One of the best dividend growth stocks trades at a bargain price after earnings
Billy Duberstein (Microchip Technology): I wrote about Microchip Technology just last month, but given that the price of the stock dipped even as the company reported an otherwise solid earnings report, it's time to revisit.
In Microchip's fourth fiscal quarter, which ended March 31 -- revenue grew 21.1% year over year, and non-GAAP (adjusted) earnings per share (EPS) was $1.64, with both figures beating expectations. Management also guided for revenue between $2.25 billion and $2.32 billion in the current quarter, suggesting sequential growth between 1% and 4%, vs. expectations of $2.26 billion.
Given the results, why did the stock fall? Likely, it had to do with commentary about some customers requesting push-outs for deliveries of products, and Microchip choosing to hold that inventory on its balance sheet as a favor. Investors never like to see a company's orders pushed out or inventory build, especially when the threat of recession looms.
However, I think that concern is way overblown. After all, Microchip has been one of the most supply constrained chipmakers during the shortage that followed the height of the COVID-19 pandemic, with its current backlog exceeding last year's revenue. And a lot of the push-outs are from non-cancelable orders made during the shortage period last year. So while some revenue may be deferred, Microchip will eventually sell those chips.
Meanwhile, the company still guided for sequential growth, meaning these push-outs are likely from a relatively small number of customers. CEO Ganesh Moorthy noted on the conference call with analysts:
It's a strange environment where I think in the shorter term, there are more people looking to push out because they're uncertain about their business. But we're also seeing cases where people who wanted to push out several months ago coming back in and wanting to pull it back in as well. So I think sometimes there is an overcorrection on both sides, and I would not be surprised as we go through the second half of this year that some of all the push-outs that are happening today if the environment strengthens, it could just as well come right back out at that point in time.
In the bigger picture, Microchip is well positioned, with a broad portfolio of high-margin microcontroller, analog, FPGA, and silicon carbide products in relatively resilient end markets such as industrial, aerospace and defense, Internet of Things, data center networking, and auto chips, with consumer applications making up a relatively small part of its customer base.
Management noted six particular "megatrends" the company has targeted since fiscal 2021, disclosing that revenue growth from those megatrend products has been double that of the overall company since that time, increasing from 34% to 45% of revenue over just two years.
As megatrend revenue makes up a larger and larger proportion of overall sales, Microchip could sustain a relatively high growth rate for a number of years. Meanwhile, the stock only trades around 12 times trailing non-GAAP EPS.
As a sweetener, management also just achieved its leverage target of 1.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA). Since the company has hit this milestone, management will accelerate the percentage of free cash flow that goes to shareholders via dividends and stock buybacks.
Last quarter, Microchip paid 62.5% of cash flow to shareholders, with the rest going to debt paydown. However, management plans to increase that proportion by 500 basis points each quarter going forward, hitting 100% of cash flow going to shareholders in about seven quarters.
And with last quarter's dividend increase to $0.383 per share, Microchip's dividend yield is now more than 2.1%, with that payout poised to increase steadily in the quarter and years ahead.
