The tech sector is full of fast-moving, cutting-edge, and “at the forefront” companies. Do you know what powers all of that? Boring old semiconductors, that’s what. It doesn’t matter whether it’s a high-tech server supporting the latest cloud-computing software firm, or your toaster, they all have a mess of semiconductors and computer chips inside.
As we continue to become ever-so-reliant on technology in our daily lives, the number of semiconductors we encounter only continues to increase.
While the sector is considered a cyclical one, there’s still pretty stable demand, especially for the most basic of semiconductors. Stable demand means stable cash flows, and where there’s stable cash flows there’s big dividends.
In fact, the PHLX SOX Semiconductor Sector Index — which is the industry benchmark — features a yield of around 1.5%. That’s higher than the broader NASDAQ Composite. However, many individual semiconductor stocks feature yields above 3%.
Despite many of their decent yields, many investors seeking dividend stocks tend to overlook the boring semiconductors. That’s a shame, as they provide a stable way to play much of the high growth of high technology. Luckily, we’re here to help at InvestorPlace.
Here are three semiconductor stocks to buy for big dividends today.
Big Dividend Semiconductors: Microchip Technology Inc. (MCHP)
Dividend Yield: 3.11%
When it comes to the semiconductors and dividends, boring is beautiful. Case in point: Microchip Technology (MCHP).
MCHP produces analog and microcontroller semiconductors. These kind of chips are found in items such as clothes dryers, garage door remotes, diabetes glucose monitors, and various other consumer products. But, boring isn’t bad — boring is the stuff that dividends are made of.
Thanks to its steady stream of cash, MCHP has a very low debt burden, even more so after subtracting cash on hand and short-term investments. More importantly, it generates more than enough ample free cash flow to continually increase its big dividend, which is something the company has done 47 times since it started declaring a payout in 2003.
As for the debt it has, MCHP has been using it wisely for acquisitions in the microcontroller space.
This has giving the company access to “higher tech” sectors such as LED lighting and Bluetooth connectivity. However, its latest acquisition could be a game changer for Microchip. Reuters recently reported that MCHP has announced a bid for rival microcontroller/analog semiconductor maker Atmel (ATML). That buyout would give MCHP enough scale to compete with the largest companies in the sector and provide increased cash flow down the line.
In the meantime, investors can feast on MCHP’s big 3.11% dividend.
Big Dividend Semiconductors: Taiwan Semiconductor Mfg. Co. (TSM)
Dividend Yield: 3.15%
Taiwan Semiconductor (TSM) is a unique bird among the semiconductors. That’s because it doesn’t design chips — it does the dirty work and operates as a foundry. Basically, TSM serves as a third-party manufacturer for other semiconductor companies. It just cranks out chip after chip, and charges hefty fees for its services.
All in all, TSM has approximately 450 different customers and has manufactured more than 8,800 different semiconductors since its founding in 1987. This makes it the largest foundry-focused company in world.
Its position as the grunt of the semiconductor value chain has afforded TSM some decent margins. For the latest quarter, Taiwan Semiconductor realized gross margins of almost 46%. Those margins have also helped on the cash flow front. The company has also paid a dividend every year since it went public in 1994, and in 2014 and 2015 those payouts got a huge bump upward.
Dividends could get a bigger bump in the future, too. TSM has filed to open a new plant in China to take advantage of the low-end cellphone and device market that’s growing there. Lower wages in China will only serve to further boost margins and pad its current 3.15% dividend.
Big Dividend Semiconductors: Texas Instruments Incorporated (TXN)
Dividend Yield: 2.64%
Sector stalwart Texas Instruments (TXN) could offer the best of both worlds when looking at semiconductors. On one hand, the company produces plenty of the boring analog-style chips. Sales from these sorts of chips continue to power profit and cash flow at TXN. Similar to previously-mentioned MCHP, boring is beautiful.
However, TXN has significant growth as well.
The other side of Texas Instruments is filled with semiconductors for today’s hottest and most high-tech technology concepts. TXN makes a host of semiconductors for items such as near-field communication chips, heads-up displays, and bio-sensing devices. This puts TXN smack in the middle of the smartphone and wearable devices markets. Add in other tech sub-sectors, such as chips for Internet of Things connectivity and renewable energy, and you have a recipe to keep Texas Instruments growing well into the future.
This will also help grow TXN’s dividend and keep its streak alive. This year, TXN managed to increase its payout by 12%. That was the twelfth consecutive year of dividend increases. With the combination of boring and high-tech powering it forward, more dividend increases are almost assured.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.