The tech industry isn’t generally viewed as a place for yielding dividends, let alone rapid dividend growth. However, as they mature, many tech companies choose to offer payouts and, in some cases, increase them quickly.
Those huge gains are appealing to more investors as inflation hit 8.3% year over year, hurting many retirees. Also, many stocks offer payouts that are well above average S&P500 Dividend yield of around 1.6%. Investors looking for such dividend stocks should consider this Broadcom (AVGO 0.47%), Digital Realty Trust (DLR 0.17%)and Texas Instruments (TXN 1.59%). Let’s find out a little more about these three hyper-growth dividend stocks.
1. A cash cow stock with tons of dividend growth firepower
Justin Pope (Broadcom): Connectivity is a popular investment theme on Wall Street, and with good reason. The world is becoming increasingly digital. Various technologies, including streaming, IoT, gaming and autonomous driving, rely on sending data from one place to another. Broadcom specializes in semiconductor solutions for connectivity and network applications. You can find its products in devices such as consumer electronics, routers, automated factories, Bluetooth devices, data centers and more.
The company is growing and very profitable; Broadcom has grown its revenue by nearly 30% on annual average over the past decade, helped in part by the immense growth of smartphones around the world. Additionally, the company generates nearly $0.49 in free cash flow for every dollar in sales, which allows the company to spend billions of cash each year.
Sharing those profits with shareholders via a dividend has become routine for Broadcom; Management has increased its dividend annually for 13 straight years, putting it on track to become a Dividend Aristocrat. The dividend is a solid 3.3% at the current share price, but the payout’s rapid growth is what’s most impressive. Shareholders have received annual increases averaging 18% over the past three years, beating even today’s hot inflation rates. The payout ratio is quite manageable at 44%, giving Broadcom room to remain financially flexible.
Broadcom is trying to diversify its business by getting into software. It acquired Symantec in 2018 and CA Technologies in 2019 to form its infrastructure software division, which now accounts for about a quarter of Broadcom’s total revenue. Those two deals totaled nearly $30 billion, but more deals are to come. The company has a pending agreement to acquire a cloud software company Vmware for $61 billion in cash and stock.
Investors should keep a close eye on developments regarding the upcoming acquisition of Broadcom and follow the company’s financial performance. Significant purchases take time to properly digest, and big deals don’t always help a company. However, Broadcom’s hefty and growing dividend is well-funded by cash earnings, and a successful acquisition could bolster the business over the long term.
2. Digital Realty has been delivering steady dividend increases for over a decade
Jake Lerch (Digital Realty Trust): If you’re looking for a tech-focused company that delivers consistent dividend growth, Digital Realty Trust is a name to know. The real estate fund (REIT) develops real estate for use as data centers and then leases space to customers. Data centers are effectively the warehouses that store the world’s electronic data. With the advent of cloud computingthe demand for data centers has skyrocketed.
And as demand for its properties increased, Digital Realty passed steady cash returns to shareholders. The company has increased its annual dividend for more than 10 straight years. The current dividend yield is 4.06%.
Still, there are risks for Digital Realty. The first is common among REITs: rising interest rates. As interest rates rise, REITs become less attractive because investors can easily switch into risk-free government bonds or bonds and earn similar (or even better) returns. Additionally, REITs run the risk of having to refinance their (usually large) debt burdens at higher interest rates — which can squeeze profit margins and potentially jeopardize dividend payouts.
The second risk is that cloud companies will choose to build and operate their own data centers, completely excluding Digital Realty from the process. That’s the position of Jim Chanos, one of the most prominent short sellers in the world. Chanos takes a stand against digital reality, arguing that some of his biggest clients (alphabet, Microsoft, Amazon) will eventually turn against it. So far the bet seems to be paying off. Digital Realty’s stock price is down 33% year-to-date.
High inflation combined with rising interest rates will keep equities under pressure in the short term. However, long-term investors might find Digital Realty’s steady dividend income too good to resist, especially if you think the cloud revolution is just getting started.
3. The traditional chip company at the heart of new technologies
Will Healy (Texas instruments): Texas Instruments announced its first dividend in 1962, but it took 42 years to embark on its current path of dividend growth. When Rich Templeton became CEO in 2004, TI was paying less than $0.09 per share in dividends. After becoming CEO, Templeton put his company on the path to annual dividend increases. The increases were so significant that the dividend grew at a compound annual growth rate of 25% between 2004 and 2021.
TI just approved its latest raise, which is a more modest 8%. Still, today’s dividend is $4.96 per share annually, which translates to a yield of about 3%. The 2021 dividend accounted for 62% of the company’s free cash flow. This leaves the company with enough cash to increase dividends, buy back stock, or invest in its business.
TI supports that dividend by designing and building analog and embedded semiconductor chips. Since the latest digital chips can’t function without TI’s analog chips, this effectively secures a long-term business book for the semiconductor stock.
About 62% of sales come from the industrial and automotive sectors. Also its chips are an integral part of Apple‘s iPhone, and analysts widely believe that the customer that generates 9% of TI’s revenue is Apple. In total, TI manufactures approximately 80,000 products serving 100,000 customers.
These customers drove revenue to $10.1 billion for the first half of 2022, up 14% from the same period in 2021. Net income rose 22% to $4.5 billion for the period as TI Growth in cost of sales during this period limited to 2%.
TI’s stock price is down 17.2% over the past year, slightly behind the S&P 500, which fell 14.1%. Still, it has sidestepped the massive decline seen in other tech stocks. Additionally, the falling share price means investors can buy this growing dividend payer at 17.9 times earnings. That low valuation, coupled with TI’s pivotal role in the technology space, should keep dividend growth on a sustainable path.