Of 56 reasonably sized semiconductor companies, 22 pay a dividend today. Only four of them can boast something more generous than analog-chip maker Microchip Technologies (NASDAQ:MCHP) and its 3.2% dividend yield.
Is Microchip's yield the real McCoy, suitable for income investors in the long run? Let's find out.
First, I'll note that Microchip's 3.2% yield looks good in the context of the semiconductor industry or the market at large, but it's actually low compared to the company's own recent history:
The yield topped 4% as recently as two years ago. Buying Microchip Technologies shares to take advantage of spiking dividend yields isn't quite the opportunistic power play it might seem.
If that's what you're looking for, you should take a closer look at pan-European chipmaker STMicroelectronics (NYSE:STM). Sparked by dramatically higher payouts and helped by a stable stock price over the last five years, STMicro's yield has risen from less than 1.7% to more than 4.4%.
Then again, soft share price gains might not be what you're looking for, either. Microchip Technologies investors had to fight the dividend-yield headwinds of 58% higher stock prices, and it has provided a much stronger total return than STMicro -- dividends and all:
As it turns out, Microchip's large payouts might be more sustainable than those of its high-yielding semiconductor brethren.
Microchip allocated almost exactly half of its free cash flow to its dividend budget over the last four quarters. Power management specialist Intersil (NASDAQ:ISIL) and Taiwanese display controller veteran Himax Technologies (NASDAQ:HIMX) may offer slightly juicier dividend yields at 3.3% each, but Intersil's cash payout ratio stands at a much higher 68% and Himax had to dip into cash reserves before printing the last few dividend checks. Microchip simply has more headroom for future dividend growth than these cash-impaired rivals.
And STMicro's dividend payouts spiked to over 700% of its free cash flow. That has nothing to do with suddenly soaring dividend costs, but with free cash flow skimming very close to the breakeven point. The company rarely reports any sort of positive free cash flow, so it's something of a breakthrough when STMicro can present a cash payout ratio at all.
Microchip doesn't have those cash flow problems, which immediately raises its credibility as a solid dividend stock. The company broke above the breakeven free cash flow point in 2002 and never delivered negative trailing cash flow again.
The stock's dividend story isn't much different from that of Maxim Integrated Products (NASDAQ:MXIM). Like Microchip, Maxim also looks back at more than a decade of positive free cash flow, a cash payout ratio below 50%, and a current dividend yield above 3%.
If Microchip has a dividend weakness, it would be its steady but slow dividend increases. The company's payouts per share have in total risen just 4.6% over the last five years. Maxim's payouts rose 40% over the same period, or 7.7% this year alone.
So is Microchip Technologies' high dividend yield the real deal? The slow dividend boosts leave room for plenty of improvement, but strong cash flows even in cyclical market downturns make me believe that those improvements may be on their way.
Yes, Microchip's dividend is the real McCoy. It's not perfect, but it is a darn good start.
Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.