The technology sector is, surprisingly, a haven for income investors. There are several technology stocks that pay dividend yields that are significantly above the S&P 500 average yield of around 2%. This wasn't always the case. Just a few years ago, technology companies loathed the idea of paying dividends, insisting instead that they needed to retain as much cash flow as possible in order to reinvest in the business.
But as the biggest technology companies grew into huge megacaps, their capital expenditure requirements eased, and now many technology companies generate more than enough cash flow to give a little back to shareholders each quarter.
Within the technology sector, semiconductor giants Intel Corporation (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM) are two premier dividend payers. Here's a head-to-head matchup between these two tech titans to determine which is the better buy for income investors.
First and foremost, income investors are concerned with dividend yield. Since dividend yield is expressed as a percentage, it reveals which stocks will pay you more income for each dollar invested. Based on their 2014 dividend payments, Intel and Qualcomm yield 3.1% and 2.4%, respectively.
As a result, Intel has the early lead, and its advantage here is more significant than meets the eye. A difference of 70 basis points might not seem like much, but for every dollar invested, Intel provides 29% more income.
Over the past year, Intel has consistently yielded more than Qualcomm, although the spread did tighten when Qualcomm very recently increased its dividend by 14%. This pushes its forward yield to 2.7%, but Intel still offers 14% more income, even including Qualcomm's raise. As a result, Intel is the better stock for income right now.
Equally important to dividend yield is the sustainability of a company's dividend. After all, if a company comes under financial duress, dividends can be cut. One of the best ways to analyze dividend sustainability is the free cash flow payout ratio. This metric reveals how much of a company's free cash flow is being distributed as a dividend payment to shareholders.
Intel generated $10.3 billion of free cash flow and paid $4.4 billion of dividends last year. That means Intel maintains a very comfortable 42% free cash flow payout ratio.
Qualcomm raked in $7.7 billion of free cash flow in fiscal 2014. In that period, it distributed $2.5 billion of dividends, for a 32% free cash flow payout ratio. Qualcomm held a 33% payout ratio in the subsequent first fiscal quarter of 2015.
Both companies generate more than enough free cash flow to pay their dividends, but Qualcomm has the edge here.
Dividend growth prospects
In addition to evaluating how much income investors will receive now, it's also useful to determine which stocks pay their investors more over time. The best-of-breed dividend payers can raise their dividends every year. This makes sense, since the companies that grow cash flow can grow dividends as well.
Qualcomm has a better track record of dividend growth in recent years. Over the past five years, Qualcomm has increased its dividend by 19% compounded annually. By comparison, Intel's five-year average dividend growth is 8% per year. Both companies raise their dividends at rates that handily exceed inflation, but again Qualcomm has the edge -- its dividend growth is more than double Intel's in the past five years.
Intel and Qualcomm are both highly profitable companies and solid dividend stocks. Both of them pay dividend yields that beat the overall market. And both of them grow their dividends at inflation-beating rates, thanks to their strong cash generation.
But in this direct match up, there can only be one winner. While Intel pays its investors more now, Qualcomm has much stronger dividend growth, and its free cash flow coverage is better as well. For these reasons, Qualcomm is the better semiconductor dividend stock.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Qualcomm. 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.