Chipmaker Intel (NASDAQ:INTC) had become well known for its steady dividend increases. However, in late 2013 the company disappointed investors by not further increasing its dividend payout.

The reason that Intel didn't boost its dividend was simple: things began to go downhill for the company's core PC business in late 2012, with the company posting year-over-year revenue declines in both 2012 and 2013.

It was an uncertain time for Intel and while raising the dividend may have appeased some income investors, it probably wouldn't have been the most fiscally responsible move on the company's part.

However, 2014 proved to be a record revenue year for the company and 2015 is expected to come in just slightly below 2014 in terms of revenue. Additionally, the company is forecasting a record 2016 in terms of revenue (and just a tad short of record earnings per share) as its data center business continues to boom and its PC business stabilizes.

With that in mind, it's worth asking the following question: Will Intel raise its dividend in 2016? I think the answer to that is "yes."

Understanding Intel's capital allocation strategy
Intel has made it clear that its capital allocation priorities are as follows:

  1. Invest in the business (research and development, capex, etc.)
  2. Dividend
  3. Share repurchase program

Intel generally has plenty of cash left over after incurring operating expenses and shelling billions out on expensive chip manufacturing equipment. This excess, known as "free cash flow," is what's left to return to shareholders in the form of dividends and stock buybacks.

Does Intel have the capacity to raise its dividend?
To get a sense of how much capacity Intel has to increase its dividend (if at all), it's worth looking at the amount of free cash flow per share the company has been able to generate over the last 12 months:

Intc Fcfpershare

Image source: YCharts.

As you can see, the company generated well north of $2 per share in free cash flow. To put this into context, the company's dividend currently sits at $1.04 on an annualized basis. This suggests that there is ample room for the company to boost its dividend late next year.

Will Intel actually raise the dividend?
Intel spent a good deal of time at its most recent investor meeting discussing how the company can still be a growth company even if the PC market declines by as much as 10% in a given year (assuming that the company's other business units -- particularly the data center group -- continue to perform, that is).

I expect that by Intel's late 2016 investor meeting, the company will guide to another year of growth in 2017 (I expect PCs/clients to once again be flat to slightly down, with data center growing nicely again). Even modest growth should allow the company to hit record earnings per share (assuming no significant reduction in gross profit margin percentage or spike in operating expenses).

In that case, Intel should be able to confidently raise the dividend in late 2016 effective throughout 2017. Additionally, since the company will spend 2016 trying to get back to roughly zero net cash after its purchase of Altera (NASDAQ:ALTR), I expect the company to effectively halt share repurchases for the year but reinitiate them in earnest during 2017.

All in all, the long-term picture looks pretty good for those who value Intel's dividend. 

Ashraf Eassa owns shares of Intel. 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.