The tech space isn’t usually a place to look for dividend-paying stocks as companies in the tech sector are usually busy reinvesting their earnings to stay on top of the ever-changing trends. But some of the companies in this space carry decent dividend yields, giving investors an opportunity to benefit from a combination of market-beating stock price gains and consistent dividend inflows.
In this article, I will take a closer look attwo such tech stocks — Intel (NASDAQ:INTC) and Cypress Semiconductor (NASDAQ:CY) — explaining why they could be good bets for investors looking to add dividend-paying tech stocks to their portfolio.
Intel is one of the top dividend choices in the tech industry given its history of paying uninterrupted dividends since 1992. Chipzilla currently sports a 2.30% yield, higher than the 1.9% industry average. What’s more, Intel isn’t too expensive either as its trailing price to earnings (P/E) ratio of 15.7 is well below the 26.3 industry average, while a forward PE multiple of 14 points toward bottom-line growth.
Moreover, Intel has consistently raised its payout since 2003. In 2017, it increased its payout by almost 6%. Looking ahead, a payout ratio of 37% and rapidly growing earnings means that future increases are likely. Intel expects $3.25 per share in earnings in the fiscal year 2017 — far more optimistic than the original guidance of $3.00 per share — which is substantially higher than the fiscal year 2016’s earnings of $2.72 per share.
So, Intel looks like a fairly safe bet when it comes to picking a dividend-paying tech stock given its conservative payout ratio, cheap valuation, and a solid history of dividend increases. But what makes it even more enticing is the ability to deliver solid gains into the future. Intel stock exited 2017 after gaining almost 28%, and it looks well-placed to sustain this momentum thanks to the opportunities it is pursuing in fast-growing areas.
Intel’s Internet of Things business is growing at an impressive pace, clocking 23% year over year growth in the latest quarter. The automotive business has played a critical role in this growth, thanks to Intel’s acquisitions and partnerships. Intel landed 14 design wins in the automotive space during the first three quarters of 2017 driven by the Mobileye acquisition, outpacing 2016’s win rate when Mobileye (which was independent at that time) had just 12 wins to show for the entire year.
In all, Intel’s business outlook appears to be solid, making it a top pick for investors looking for value, growth, and dividend in the same package.
Cypress doesn’t have a very illustrious dividend paying history when compared to Intel, nor does its payout seems sustainable at first glance. The chipmaker paid its first dividend in 2011 when its earnings were growing at a terrific pace because of robust demand for its touchscreen controllers used in smartphones.
At that time, Cypress hardly had any debt, but the company hit a lean patch in the following year’s thanks to weak end-market demand and intense competition in the touchscreen controller space. However, the chipmaker continued paying a dividend despite falling into the red, becoming debt-laden in the process.
Cypress continues to be a loss-making entity even now. It has reported a loss of $0.40 per share over the trailing twelve months, but it still carries a strong dividend yield of 2.90%. What’s more, it increased its payout by 2.30% in 2017. Investors won’t be wrong to challenge the credibility of Cypress’ dividend, but a closer look will reveal why this is a stock that could deliver a combination of solid dividends and stock price appreciation for a long time.
For starters, Cypress has hit a growth patch once again. Its revenue grew 15.4% during the last reported quarter, GAAP net income increased 17% to $11 million (or $0.03 per share), and gross margin improved 2.5% over last year. The company expects GAAP earnings of $0.02 per share at the midpoint in the fourth-quarter, indicating that it can sustain its profitable streak.
More importantly, Cypress is doing the right thing by diversifying its business across verticals such as automotive and industrial to avoid a repeat of the overreliance upon one technology that burnt it a few years ago. Its automotive business is now bigger than NVIDIA‘s thanks to partnerships with Tier 1 component suppliers such as Denso, Bosch, and Continental.
These clients will help Cypress tap fast-growing automotive niches such as advanced driver assistance systems (ADAS), a space that’s expected to grow at an annual rate of 20% going forward. Then there’s the USB-C market that’s anticipated to expand at 89% a year, as per the company’s own estimates. Cypress commands an impressive 35% of this market, and this should give its finances a nice boost in the long run.
Not surprisingly, Cypress’ earnings are expected to grow at a compound annual growth rate (CAGR) of 45.5% over the next five years. This increased earnings power should allow the company to sustain its impressive dividend in the long run, and also deliver stock market gains despite a 34% rally in 2017.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Cypress Semiconductor and Intel. The Motley Fool has a disclosure policy.
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