Branded chipmakers have big margins, but these stocks have better yield.
In years past, semiconductor stocks were popular income investments because they offered steady dividend growth as the leading names in the space like Intel Corp. (ticker: INTC) and Texas Instruments (TXN) thrived. The sector has undergone a wave of consolidation and fierce mobile competition in the last decade or so, and the biggest brands out there sometimes suffer sluggish share appreciation and rather meager dividend boosts. There’s still opportunity for dividends among chipmakers, but these days investors have to be more selective. Here are seven picks in the sector that stand out because of their impressive income potential.
In 2015, Avago Technologies acquired rival Broadcom for $37 billion in cash and stocks to create what is now a $125 billion semiconductor giant, known as Broadcom, that operates a wide business spanning three general work areas: semiconductors, software and intellectual property licensing. The first segment is exactly what it sounds like and is a traditional chipmaking business, but the others include enterprise information technology service agreements and patented technologies that Broadcom licenses to others for a regular flow of royalties. Together, this dominant and diverse operation fuels a steady stream of revenue that supports generous dividends of $3.25 per quarter.
Current yield: 4.2%
ChipMOS Technologies (IMOS)
Taiwan’s ChipMOS manufactures precision integrated circuits for third parties and offers related assembly and testing services. In other words, it does all parts of the production process even though IMOS may not have proprietary designs of its own. While the blueprints and intellectual property are where the big margins are, IMOS has done a brisk business of cranking out finished products for others — particularly in the arena of flat-panel display assets. This steady business supports generous once-a-year payouts to shareholders.
Current yield: 5.6%
NVE Corp. (NVEC)
With a regular payday of $1 a quarter and a yield that is about three times that of the typical S&P 500 stock, NVE is definitely a chip stock to watch if you’re an income investor. The company is focused on “spintronics,” a cutting-edge nanotechnology that relies on the spin of electrons to store and transmit information. This technology has use in everything from medical sensors to magnetic switches for manufacturers to internet-connected electronics. At just $300 million in market capitalization, this is one of the smaller semiconductor-related plays out there but perhaps one of the most interesting names among chip stocks.
Current yield: 6.5%
Silicon Motion Technology Corp. (SIMO)
SIMO is a semiconductor manufacturer that specializes in flash memory applications for solid-state storage drives used in PCs, mobile storage for smartphones and enterprise-grade data solutions used in industrial and commercial applications. Based in Hong Kong, Silicon Motion Technology is close to key electronics manufacturers in Asia, and that helps drum up business for its various data storage products — and given the strength of this technology in 2020 as new workflows under social distancing guidelines place strains on remote data systems, SIMO is looking quite resilient; shares have almost doubled since their March lows, and 2020’s quarterly dividend of 35 cents is roughly 17% higher than last year’s payout.
Current yield: 3.2%
Taiwan Semiconductor Manufacturing Co. (TSM)
At more than $300 billion in market value, Taiwan Semiconductor Manufacturing is one of the biggest chipmakers on the planet. However, unlike some of the higher-profile brands out there like Intel, the company mostly manufactures and sells circuits and other components based on third-party designs or creates chips for lower-profile consumer electronics. While not as high margin as working on its own branded chips, the sheer scale of TSM really adds up as it serves customers in electronics, communications, consumer goods and industrial operations all over the world. TSM stock is up by double digits in 2020 despite challenges for other stocks, and its 42-cent dividend adds up to better than the typical S&P dividend stock on top of that.
Current yield: 2.5%
United Microelectronics Corp. (UMC)
UMC is another stock that has outperformed lately with a positive year-to-date return and shares that have surged 40% from their spring lows. Similar to TSM though considerably smaller at just $6 billion in size, UMC is a semiconductor foundry that provides services to other engineering and tech firms. These include wafer fabrication, assembly and testing services. One particularly interesting focus of UMC is its research and development of products for solar energy, a growth industry that could provide a nice path to growth in the years to come. Though payouts are only once per year, the generous yield of UMC makes it worth consideration.
Current yield: 4.9%
Xperi Holding Corp. (XPER)
Xperi literature says the company enables “extraordinary experiences integrated into devices.” This is a gussied-up way of saying it creates the chips and other hardware to power media platforms that range from mobile cameras, automotive audio systems, studio-grade video technology and more. Some of the technologies it services are marketed under the TiVo and IMAX brands. With a broad portfolio that includes in-demand home entertainment options, XPER has hung tough during the volatility of 2020 and continues to pay a reliable 20-cent dividend each quarter.
Current yield: 5.9%
Seven chip stocks with strong dividends:
— Broadcom (AVGO)
— ChipMOS Technologies (IMOS)
— NVE Corp. (NVEC)
— Silicon Motion Technology Corp. (SIMO)
— Taiwan Semiconductor Manufacturing Co. (TSM)
— United Microelectronics Corp. (UMC)
— Xperi Holding Corp. (XPER)
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