Chip maker Intel (INTC 0.64%) has been a common pick for dividend investors for years. But in 2014, the company threw them a curve ball by not serving up its typical annual dividend increase. Some investors wondered: Does this signal the beginning of bad times for Intel as a dividend stock? A close look at the company and its dividend, however, reveal that the tech stock still offers solid prospects for income investors.
Intel's dividend history
One of the first trends investors like to review before they buy a dividend stock is naturally the dividend history.
INTC Dividends Paid (TTM) data by YCharts
We can see here that the company has paused its stream of annual increases in the past. This history of sporadically halting increases shows us that the company doesn't adhere to a strict policy of increasing its dividend every year, as some stalwarts do. There's no reason for Intel investors to panic quite yet.
Indeed, Intel has already jumped back on course, announcing an increase to its annual dividend for 2015, from $0.90 to $0.96. And for additional peace of mind, Intel's chairman, Andy Bryant, said in the annoucement press release that the move "reflects the board's ongoing commitment to create value and return cash to Intel's stockholders" -- the key words here, of course, being "ongoing commitment."
Reviewing the metrics behind Intel's dividend
Investors looking for steady income from dividends should always check in on both free cash flow and payout ratio. Both of these metrics provide insight into the company's ability to consistently pay out cash to shareholders.
Free cash flow is what companies have left after taking care of operating expenses and making investments. Companies can save up this cash for future investments and acquisitions, use it to repurchase shares, or pay it out to shareholders.
While Intel's free cash flow has held steady at the same levels for the past four years, it's high enough to sustain further increases in the future, assuming Intel can at least maintain these levels. Since 2011, Intel has generated approximately $8 to $10 billion in free cash flow annually, paying out an average of just $4.4 billion in dividends each year.
Investors can also look at dividends as a percentage of earnings -- the company's payout ratio. Today, Intel is paying out about 43% of its earnings in dividends. While this is higher than the excellent 31% to 33% payout ratio Intel achieved in 2010 and 2011, the current payments are not exceedingly burdensome.
In general, payout ratios below 50% are pretty conservative for large cap cash cows like Intel. A low payout ratio gives a company's dividend some breathing room if earnings ever take a beating, making a consistent dividend over the long haul more likely.
Overall, Intel still looks like an acceptable candidate for income investors. The company's failure to grow free cash flow recently suggests future dividend increases may be less likely, but this market leader's strong cash position and dividend history make cuts look even less probable. Intel is poised to pay out a steady stream of income for years.
Today, investors who buy shares will get a 2.4% dividend yield on their cost basis. Sure, it's not the same 4% plus investors could have captured buying Intel in 2013, but it's not bad for a market leading cash cow.
