Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll dive back into the high-growth tech sector and have a look at why processing and graphics chip maker NVIDIA (NVDA 2.95%) makes for a delectable income play for investors.
Things are getting chippy
There are two primary downsides to the chip industry: The cyclicality of the tech replacement cycle makes steady growth a serious challenge, and it requires constant innovation just to keep up with the curve. Simply staying the course isn't enough to keep a technology company in the spotlight anymore.
Advanced Micro Devices (AMD 0.44%), for instance, bet its chips (pun intended) on the next-generation gaming consoles, winning a spot in both the new Microsoft Xbox One and Sony PlayStation 4 while NVIDIA's graphic chips were completely left out of the new consoles. Admittedly, NVIDIA wasn't exactly targeting being in these next-gen consoles by the admission of its own management team, but it shows exactly how quickly a tech company can be brushed aside if it doesn't constantly innovate. The same can be said for AMD's PC chip inefficiencies, which have pushed the company to shed 15% of its workforce in an ongoing restructuring.
Another example is Qualcomm (QCOM 0.04%), which is threatening to completely unseat the need for radio-frequency chip provider in 4G LTE-capable devices starting in the second-half of the year. Qualcomm introduced a new all-in-one chip known as the RF360 in February which can handle RF signals on the front-end and could seriously put a dent into RF manufacturers like TriQuint Semiconductor which has manufacturing deals currently in place with Apple and Samsung for use in their smartphones.
A clear-cut winner
I've said it previously, and I'll say it again: The allure of NVIDIA has little to do with its still dominant graphics chip line and everything to do with the potential for its LTE-capable Tegra 4i line of smartphone and tablet processing chips.
Although many tech reports have claimed that the Tegra 4i is quite the battery hog, it also gives Qualcomm a run for its money with regard to processing graphics -- especially for consumers who use their phone as a gaming or movie-viewing device. That really shouldn't come as a surprise, as NVIDIA has focused its efforts for more than a decade on improving graphics quality in PCs and laptops.
Despite being a relatively new entrant into the smartphone and tablet market, NVIDIA has been well accepted. Year-over-year growth in 2012 was mostly flat, with the company transitioning from its Tegra 3 to next-generation Tegra 4 chips, but that's still a lot better than I can say for some of its peers. Intel (INTC -0.25%), a company that I think has a strong future tied to smartphone and tablet hardware as well as cloud computing, saw its market share tick up by just 0.2% in 2012, according to Strategy Analytics. Furthermore, Broadcom (NASDAQ: BRCM), which has significantly more market share than NVIDIA, will slowly cede that share over time in the U.S., since its processing chips are often found in older 3G-capable smartphones. Broadcom may find a lot of success overseas, but I'd say its smartphone market share is only set to tumble in the United States.
It also doesn't hurt that NVIDIA is taking a stand at entering the handheld-gaming market with Project Shield, which is soon set to launch. The portable device will combine NVIDIA's processing and graphics technology into one unit, giving the company better control over its inventory and production than ever before.
Show me the money, NVIDIA
The real reason NVIDIA excites me and should excite income investors is that it's finally begun paying back its shareholders. The company has been well capitalized for a while, ending its most recent quarter with $3.69 billion in cash, or $6.38 per share. This leaves plenty of cash available for management to reinvest in R&D, to potentially make acquisitions as it sees fit, and certainly to reward shareholders for sticking with the company as it transitions from a pure graphics producer to an integrated processing company.
Earlier this year, NVIDIA stated its intention of returning money to shareholders via share repurchases. NVIDIA struck a deal with Goldman Sachs last month for the accelerated repurchase of $750 million worth of its own shares and plans to repurchase up to $1 billion worth of its shares this year alone. While not a direct payment into shareholders' pockets, share buybacks do reduce the number of shares outstanding and can make a company appear cheaper on a P/E basis.
The big moneymaker here is the dividend that NVIDIA initiated in November. It might seem a bit tame at $0.075 per quarter, or $0.30 annually, but at a current yield of 2.1% you're doing pretty well compared with the majority of tech-sector payouts. NVIDIA's payout ratio is also just 37% of next year's projected EPS. Considering that NVIDIA has topped Wall Street's EPS estimates by double digits in each of the past four quarters, I can only presume this EPS figure will head higher and its payout ratio lower, giving it ample justification to boost its dividend.
It might be difficult for some longtime followers of NVIDIA to look past the fact that this is no longer just a graphics company, but the next few years should be telltale for NVIDIA as to whether its Tegra 4i chips take hold. If sales of its Tegra 3 are any indication of how it will do, given that it entered the smartphone market completely green around the collar, then the Tegra 4i will probably be off to the races. With a balance sheet swimming in cash, a history of topping Wall Street's EPS expectations, and a flurry of new value-building initiatives for shareholders, NVIDIA has all the makings of a set-it-and-forget-it income play.