Technology stocks are a great place to find market-beating dividend yields. The stocks that comprise the S&P 500 Index yield about 2% on average, but many technology stocks pay even higher yields. Two in particular are semiconductor giants Intel Corporation (NASDAQ: INTC) and Texas Instruments Incorporated (NASDAQ: TXN).
In a head-to-head matchup of these two dividend payers, there's one that looks best for investors in it for the long haul.
Better stock for current income: Intel
One of the biggest reasons to buy a dividend stock is for a high yield. Dividend yield expresses how much dividend income you'll receive from your investment, as a percentage of each dollar invested. Intel's annualized dividend is $0.96 per share, yielding 3% based on its current share price of $31. With shares currently trading around $57, Texas Instruments offers a 2.4% dividend yield.
One reason Intel offers a higher yield is that it distributes a greater percentage of its cash flow to investors. Intel generated $10.3 billion of free cash flow last year and paid out $4.4 billion in dividends. For 2014, Intel's free cash flow payout ratio was 42%. By comparison, Texas Instruments distributed only 37% of its free cash flow in dividends last year.
Still, both companies distribute less than half of their annual free cash flow. That means both of their dividends are well-protected. On this basis, investors can earn 25% more income from Intel than from Texas Instruments, making Intel the better pick for investors looking for dividend income right now.
Better stock for future income: Texas Instruments
Since Intel has a higher payout ratio, the trade-off is that Texas Instruments shareholders could see their income grow much faster than Intel shareholders.
Over the past five years, Texas Instruments has increased its quarterly dividend by an impressive 23% compounded annually. Meanwhile, Intel's average annual dividend growth clocks in at just 8% per year in the same period. Intel's dividend growth has slowed down in recent years. In fact, before Intel's recent 6% dividend bump, the company had gone more than two full years without raising its payout.
Intel's slowing dividend growth is the result of its slowing industry. Intel derives nearly two-thirds of its profits from personal computers. Because growth in PC shipments has ground to a halt in recent years, Intel hasn't been able to increase its dividend much. In a recent report, technology market research firm IDC stated that global PC shipments fell 2.4% in the fourth quarter last year. PC sales were 80.8 million for the quarter, down from 82.2 million units the previous year. Because of this, Intel grew total revenue by 6% last year.
Texas Instruments caters to different markets than Intel, which are growing at higher rates. The company derived 83% of its 2014 revenue from two specific industries: analog and embedded processing. These two markets have produced 9% compound annual revenue growth over the past five years. Thanks to its strong growth, Texas Instruments has raised its dividend for 11 years in a row, including a 13% increase last year.
Winner: Texas Instruments
On the surface, Intel's higher dividend yield might make it a better pick than Texas Instruments. But for investors with a longer time horizon, Texas Instruments could prove be a more rewarding dividend stock.
If Texas Instruments manages to increase dividends by 20% per year going forward, which is actually lower than its most recent five-year growth rate, its dividend will double in about three and a half years. If Intel continues to increase its dividend at 10% per year, which is unlikely given that its dividend growth has slowed significantly in recent years, it would take more than seven years to double your dividend income.
For these reasons, Texas Instruments is the better dividend stock of the two.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Intel. 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.