Many income investors likely don't consider ARM Holdings (ARMH) to be a reliable dividend stock. The chip designer has paid out 32% of its earnings over the past year as dividends, but that only translates to a paltry forward annual yield of 0.7%. Therefore, let's take a look at three of ARM's industry peers which yield-seeking investors should consider buying instead.
ARM's biggest rival: Intel
ARM's unique business of licensing chip designs to a wide variety of chipmakers prevented Intel (INTC -2.01%) from dominating the mobile market as it did with PCs and data centers. After losing the mobile market to ARM's lower-power designs, Intel desperately tried to regain market share with costly subsidies and cheap reference designs.
Although Intel's mobile business is still struggling and its PC unit remains weak, the company's data center, Internet of Things, and non-volatile memory businesses are all growing. Analysts expect those businesses to help Intel post 10% annual earnings growth over the next five years.
That bottom line strength enables Intel to pay a forward annual yield of 3.6%. Over the past 12 months, Intel has paid out 41% of its earnings as dividends. However, the company hasn't been consistent with its dividend hikes -- its quarterly dividend was stuck at $0.23 between 2012 and 2014 before finally being raised to $0.24 in 2015 and $0.26 this year.
ARM's biggest ally: Qualcomm
ARM's conquest of the mobile world probably wouldn't have been possible without Qualcomm (QCOM -2.23%), the biggest mobile chip maker in the world. Qualcomm combines ARM-based CPUs with its own Adreno GPUs in its Snapdragon SoCs.
Qualcomm's top line depends heavily on those chips, but its bottom line relies more heavily on its CDMA licensing business, which accounted for nearly 80% of its pre-tax earnings last quarter. That business has been under pressure from regulators and OEMs requesting lower fees, but analysts believe that Qualcomm can weather the storm and post annual earnings growth of 12% over the next five years.
Qualcomm currently pays a forward annual yield of 3.9%. Over the past year, the company has paid out 62% of its earnings as dividends. While that might make Qualcomm look more "generous" than ARM or Intel, it also means it has less room for dividend hikes. Nonetheless, Qualcomm has already hiked its dividend for 13 straight years, and has promised to return at least 75% of its annual free cash flow to shareholders as dividends or buybacks.
That "other" ARM chipmaker: Nvidia
Nvidia (NVDA -1.49%), which is best known for its GPUs and high-end graphics cards, also uses ARM designs in its Tegra chips. Like Qualcomm, Nvidia combines a first party GPU with an ARM-based CPU in its SoCs.
However, Tegra chips never gained much mobile market share against Qualcomm and its top rival MediaTek. However, the chips have established a market in connected cars, which boosted Tegra sales 40% annually to $157 million last quarter. Nvidia's core GPU sales rose 10% to $1.2 billion thanks to robust demand from gamers offsetting sluggish demand in the mainstream PC market. On the bottom line, analysts believe that Nvidia's annual earnings will grow at a rate of 6% over the next five years.
Nvidia currently pays a forward dividend yield of 1.5%, which is higher than ARM's but lower than Intel's or Qualcomm's. However, Nvidia's yield has also declined due to its price appreciation. Nvidia stock has rallied more than 40% over the past 12 months, while shares of Intel and Qualcomm have respectively slipped about 15% and 30%. Nvidia has paid out 34% of its earnings over the past 12 months and raised its dividend for three straight years. Over the past four years, Nvidia spent 98% of its free cash flow, or $3 billion, on buybacks and dividends. It plans to return another $1 billion to shareholders in the same way in fiscal 2017.
The key takeaway
ARM Holdings clearly isn't a great income stock, but Intel, Qualcomm, and Nvidia all pay better dividends and have unique strengths. Intel is a conservative play on the recovery of the PC market, Qualcomm is evolving from a mobile chipmaker into a jack of all trades, and Nvidia will profit from the rise of connected cars. Therefore, investors who are looking for a solid chip stock with a decent yield should consider these three companies instead of ARM.