I'll be right up front about this: I believe that it's time for investors to pony up some of their hard-earned cash and increase their stakes in the chip industry. My main reason for this belief is simple: The historically cyclical semiconductor industry has become much more predictable, since the primary end user of chips is no longer the corporate IT sector, but instead the individual consumer, by way of cell phones, digital cameras, personal computers, cars, and even "smart" ovens.

According to a recent Semiconductor Industry Association (SIA) report, such consumer products currently account for more than 50% of all chip consumption, and that percentage will inevitably increase as consumers demand ever more complex features for their electronic gizmos. There are lots of ways to play the chip sector as the growth continues, but my favorite is Taiwan Semiconductor Manufacturing (NYSE:TSM).

We'll look at the reasons why I like the company in a moment, but as for the expansion ahead in the chip industry, just look at cell phones. SIA President George Scalise recently commented that even in the developing market of China, "nearly 90% of all GSM handsets have color screens, while more than 60% have cameras . and next year, we expect to see handsets with GPS capability. The addition of these features requires high-performance flash memory, DSP [digital signal processing] circuits, RG [reference generator] circuits, etc."

You get my drift . and that's the reason I believe we're seeing such consistency in the semiconductor cycle. Again, according to the SIA, global semiconductor sales are expected to grow at a compound annual rate of 9% from 2006 to 2009, to reach roughly $321 billion in 2009, up from $227.5 billion in 2005.

To get in on the action, you could invest in industry bellwethers such as Intel (NASDAQ:INTC) and Advanced Micro Devices (NYSE:AMD), fabless designers such as Rambus (NASDAQ:RMBS), or chip-equipment suppliers such as KLA-Tencor (NASDAQ:KLAC). But I prefer Taiwan Semiconductor. It owns the largest chip foundry in the world, its size and production prowess allow it to consistently post industry-leading margins, and it's attractively valued versus its peers. Did I happen to mention that the company also pays a dividend of roughly 3%?

Let's take a quick look.

The inner workings
Taiwan Semiconductor is the world's largest dedicated semiconductor foundry -- in other words, it's a company that doesn't bother with complex and costly design processes, but rather manufacturers chips to its customers' specifications. According to IC Insights, the company held a 49% share of this market -- up from 46% in 2004 -- placing it well ahead of its nearest competitors. It operates a total of a 10 fabs: one that produces 150mm wafers, seven that manufacturer 200mm wafers, and two advanced fabs that specialize in 300mm wafer production. Given that the costs of building an advanced fab has ballooned from $1 billion in 1997 to an estimated $6 billion in 2007, you'd have to say there are fairly high barriers to entry.

Without getting into too much technical detail, suffice it to say that Taiwan Semiconductor's manufacturing and production processes are also tops in the industry, giving it a competitive advantage in addition to its sheer size. For example, the company is the dominant player in the highly lucrative 0.13-micron market for advanced wafers, as well as in using 90nm (nanometer) production technologies.

This potent blend of size and manufacturing expertise has historically allowed the company to post better margins -- its average selling price for its chips is 20%-25% ahead of its competition -- as well as higher rates of capacity utilization and a better return on invested capital than the rest of the players in the foundry universe. There's little reason to believe this situation will change in the future.

In plain English, Taiwan Semiconductor enjoys some serious economies of scale, is best in breed in terms of its production technologies, and enjoys the highest margins in the foundry universe. As the average consumer demands ever-increasing functions from his or her cell phone, digital camera, or game console, Taiwan Semiconductor's profits will grow as well.

Valuation and final thoughts
At a recent price of approximately $10.90 per share, Taiwan Semiconductor trades at approximately 15 times forward earnings, a 32% discount to smaller competitors United Microelectronics (NYSE:UMC) and Chartered Semiconductor Manufacturing (NASDAQ:CHRT). Throw in a yield of roughly 3%, and I'd say that investors might want to take a nibble at this tempting semiconductor play.

If you like the idea of getting paid to invest, check out Motley Fool Income Investor , where James Early helps you find the market's best dividend-paying stocks. Try it out free for 30 days.

Intel is a Motley Fool Inside Value recommendation.

Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than playing golf, reading The Financial Times, or rooting for the New York Giants. He welcomes your feedback at elves1us@yahoo.com. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.