2 dividend-paying tech stocks to buy in July
Chip stocks have seen choppy trade action this year, but the Semiconductor Industry PHLX Index managed to stay above the water. It has returned over 17% since the start of the year and has more than doubled in the past two years.
Prospects for further gains appear favorable. World Semiconductor Trade Statistics calls for an increase in the chip market of 19.7% in 2021 and 8.8% in 2022. Chips have become the fundamental building blocks of the global economy, along with technologies such as the Internet of objects (IoT), artificial intelligence (AI), and 5G wireless connectivity is becoming more and more ubiquitous. Not only can investors take advantage of these trends to earn decent returns, there are also some very profitable semiconductor companies that have a reputation for paying regular dividends as well.
Texas instruments (NASDAQ: TXN) and Semiconductor manufacturing in Taiwan (NYSE: TSM) are two great dividend paying tech stocks to consider buying stocks today.
1. Texas Instruments
The semiconductor industry is very competitive and can be subject to declines in demand as the global economy turns south. There is also an ongoing risk associated with rapid technological change and price pressures. It is for these reasons that investors should do well with Texas Instruments.
Texas Instruments has been in business since 1930 and has successfully overcome a wide range of geopolitical and economic obstacles. More importantly, it has structural advantages that allow it to generate significant free cash flow and pay dividends. It has 14 manufacturing sites around the world, a broad product portfolio and more than 100,000 customers who use its integrated and analog chips in a wide variety of products, including mobile phones, business computer systems and autonomous vehicles. .
Texas Instruments invests in its own manufacturing process, which allows it to reduce costs and generate healthy margins. Even during the supply chain disruptions caused by the pandemic, Texas Instruments generated $ 5.5 billion in free cash flow on revenue of $ 14.4 billion.
“[O]Our competitive advantage of in-house manufacturing and technology provides the benefits of lower cost and better control of our supply chain, which is really seen in a market environment like this, ”said Dave Pahl, vice president of investor relations, on the first quarter results conference call.
Since 2004, Texas Instruments has increased its dividend by 26% on a compound annual basis. It paid out $ 3.4 billion in dividends in 2020, suggesting a 62% cash payout ratio to free cash flow, giving the company a cushion to keep dividend payments in an environment low demand. With a current dividend yield of 2.1%, investors can buy shares in one of the best chip companies and earn above-average returns.
2. Taiwan Semiconductor
Taiwan Semiconductor Manufacturing (TSMC) has built an incredibly profitable business by manufacturing chips for other companies including Advanced micro-systems, NVIDIA, and Intelligence. It is the world’s leading chip foundry with a 57% market share. In 2020, sales and earnings per share increased by 25% and 50% respectively. The growing demand for powerful chips for 5G and artificial intelligence applications is expected to keep TSMC in growth mode.
The stock has climbed 365% in the past five years, exceeding Texas Instrument’s return by 199%. While TSMC has been the best growth stock, Texas Instruments may be the safest dividend stock. This is because TSMC pays almost all of its free cash flow in the form of dividends. Over the past four quarters, TSMC’s cash payout ratio was 96%, which doesn’t leave much leeway to maintain the dividend if demand for chips suddenly drops.
Additionally, the steep rise in TSMC shares made the stock more expensive, trading at over 30 times forward earnings estimates. This also brought its dividend yield down to 1.4%, but despite its lower dividend yield and high cash payout ratio, there are several reasons why TSMC should be a great dividend paying stock.
First, TSMC has a stronghold balance sheet, with $ 23 billion in cash at the end of the first quarter, which is more than enough to offset its debt.
Another reason investors can be confident in TSMC’s dividend payout is the future demand curve for chip technologies. The growth of the last year was no accident. The management’s capital budget for 2021 projects spending between $ 25 billion and $ 28 billion. This increase in spending is being prepared to meet the growing demand expected over the next few years for 7-nanometer, 5-nanometer, and possibly 3-nanometer chip nodes. TSMC forecasts revenue growth of between 10% and 15% on an annualized basis through 2025.
Texas Instruments and Taiwan Semiconductor Manufacturing are both rock solid. Choosing winners and losers can be difficult in the semiconductor industry, but Texas Instruments and TSMC have performed exceptionally well and should continue to reward investors with solid returns and regular dividend payouts for years to come. .
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.