The tech industry is generally not seen as a place to find dividends, let alone rapid dividend growth. However, as many tech companies mature, they choose to offer payouts and, in a few cases, increase them at a rapid rate.
These huge increases are attracting more investors, as inflation of 8.3% year over year has hurt many fixed income holders. In addition, many stocks offer well above average payouts. S&P500 dividend yield of around 1.6%. Investors looking for such dividend-paying stocks should consider Broadcom (AVGO 0.47%), Digital Real Estate Trust (DLR 0.17%)and Texas Instruments (TXN 1.59%). Let’s find out a bit more about these three hypergrowth dividend stocks.
1. A cash cow stock with tons of firepower for dividend growth
Justin Pope (Broadcom): Connectivity is a popular investing theme on Wall Street, and for good reason. The world is increasingly digital. Various technologies, including streaming, the Internet of Things, games and self-driving, rely on sending data from one place to another. Broadcom specializes in semiconductor solutions for connectivity and networking applications. You will find its products in devices such as consumer electronics, routers, automated factory equipment, Bluetooth devices, data centers, and more.
The company is growing and very profitable; Broadcom has grown its revenue by almost 30% per year on average over the past decade, thanks in part to the immense growth of smartphones around the world. Additionally, the company generates nearly $0.49 of free cash flow for every dollar of revenue, giving the company billions in cash to spend every year.
Sharing those profits with shareholders through a dividend has become routine for Broadcom; management has increased its dividend every year for 13 consecutive years, setting it on the path to becoming a dividend aristocrat. The dividend yields a solid 3.3% at the current share price, but the rapid payout growth is what’s most impressive. Shareholders have received annual increases averaging 18% over the past three years, even exceeding today’s high inflation rates. The dividend payout ratio is quite manageable at 44%, allowing Broadcom 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 sales. These two deals totaled nearly $30 billion, but more deals are on the way. The company has a pending deal to acquire a cloud software company vmware for $61 billion in cash and stock.
Investors will want to monitor developments in Broadcom’s pending acquisition and track the company’s financial performance. Large purchases take time to digest properly, and large transactions don’t always help a business. However, Broadcom’s juicy and growing dividend is well funded by cash earnings, and a successful acquisition could strengthen the company in the long run.
2. Digital Realty has steadily increased its dividends for over a decade
Jake Lerch (Digital Realty Trust): If you’re looking for a technology-focused company that offers consistent dividend growth, Digital Realty Trust is a name you need to know. Real Estate Investment Trust (REIT) develops properties to use as data centers and then leases space to customers. Data centers are, in effect, the warehouses that store global electronic data. With the rise of cloud computingdemand for data centers has exploded.
And as demand for its properties grew, Digital Realty passed steady cash returns to shareholders. The company has increased its annual dividend for more than 10 years in a row. Its current dividend yield is 4.06%.
Still, there are risks for Digital Realty. The first is common for REITs: rising interest rates. As interest rates rise, REITs lose their appeal because investors can easily trade notes or government bonds without risk and capture similar (or even higher) income. Additionally, REITs run the risk of having to refinance their (usually high) debt at higher interest rates, which can erode profit margins and potentially threaten dividend payouts.
The second risk is that cloud companies choose to build and operate their own data centers, eliminating Digital Realty from the process altogether. This is the position occupied by Jim Chanos, one of the most important short sellers in the world. Chanos is betting against digital reality, arguing that some of its biggest customers (Alphabet, Microsoft, Amazon) will eventually backfire. For the moment, the bet seems to pay 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 near term. However, longer-term investors might find Digital Realty’s stable dividend income too good to resist, especially if you think the cloud revolution is just getting started.
3. Old-school chip company at the center of new technology
will heal (Texas Instruments): Texas Instruments declared its first dividend in 1962, but it took 42 years to embark on its current dividend growth trajectory. TI paid less than $0.09 per share in dividends when Rich Templeton became CEO in 2004. After becoming a CEO, Templeton set his company on a path to annual dividend hikes. The increases have been so large that its dividend has grown at a compound annual growth rate of 25% between 2004 and 2021.
TI has just approved its latest increase, which is a more modest 8%. Yet today’s dividend is $4.96 per share per year, which yields about 3%. Its 2021 dividend claimed 62% of the company’s free cash flow. This left the company with enough cash to increase dividends, buy back shares, or invest in its business.
TI supports this dividend by designing and building analog and embedded semiconductor chips. Since the latest digital chips cannot function without TI’s analog chips, this virtually guarantees long-term business volume for semiconductor stock.
About 62% of its turnover comes from the industrial and automotive sectors. Moreover, its chips are an essential component of Appleof the iPhone, and analysts generally believe that the customer that provides 9% of TI’s revenue is Apple. In total, TI manufactures approximately 80,000 products that serve 100,000 customers.
These customers grew revenue to $10.1 billion in the first half of 2022, 14% higher than the same period in 2021. Net profit increased 22% during this period to 4 $.5 billion as TI limited revenue cost growth to 2% during this period. time.
TI’s stock price has fallen 17.2% over the past year, lagging slightly behind the S&P 500, which fell 14.1%. Still, it avoided the massive drop in other tech stocks. Additionally, the falling stock price means investors can buy this growing dividend payer at 17.9 times earnings. This low valuation, along with TI’s pivotal role in technology, should keep its dividend growth on a sustainable path.