Why Broadcom Is a Retiree’s Dream Stock – Motley Fool

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Why Broadcom Is a Retiree’s Dream Stock – Motley Fool

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The chip and software giant pays a surprisingly generous dividend.

Most investors know Broadcom (NASDAQ:AVGO) as merely a technology company. Since it does not sell its semiconductors and infrastructure software directly to consumers, some investors may know little about this tech stock. However, given its history of dividend returns, income-oriented investors would do well to take a closer look.

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The Broadcom dividend

The Broadcom dividend for its common shares now stands at $3.60 per share quarterly, or $14.40 per year. At its current price, that amounts to a cash return of 3%. To put the payout into perspective, that comes in at approximately 2.3 times the average dividend yield of 1.3% for the S&P 500.

The company began paying dividends in 2010 when investors still knew it as Avago Technologies. Until 2016, that payout increased every quarter. A few months after Avago completed its purchase of Broadcom, Inc. (and adopted its name), the company switched to yearly increases.

These payout hikes could serve retirees who need a hedge against inflation and an extra source of recurring income. Retirees also need to take note of the size of these increases. The last increase amounted to 11%: Broadcom had previously paid $13 per share annually.

That pales in comparison to the 23% increase in 2019 and the 51% hike in 2018, and stockholders do not yet know the size of the next payout hike. Still, if the past serves as an indication, retirees who earn 3% now could make significantly more by the fourth quarter, the time of the year when Broadcom has traditionally hiked the dividend.

Broadcom looks positioned to sustain the payout as well. In the fiscal second quarter of 2021, the dividend cost the company just under $1.5 billion. The dividend claimed about 43% of its $3.4 billion in free cash flow during that quarter. That ratio came to about 47% in fiscal 2020, meaning it has kept its payout sustainable relative to free cash under challenging conditions.

Additionally, unlike many dividend stocks, Broadcom continues to deliver stock price growth. It has risen by about 50% over the last 12 months and over 1,100% since 2011. If that growth continues, it will ease the temporary pain that may come with buying the stock at its 43 price-to-earnings (P/E) ratio, an earnings multiple in line with long-term historical averages.

AVGO Chart

AVGO data by YCharts

The health of Broadcom’s business

Investors can also take comfort in the fact that Broadcom knows how to pivot. As it experienced a slowing in chip sales, it turned to the software business, buying CA Technologies in 2018 and Symantec’s enterprise security business in 2019, which returned Broadcom to double-digit revenue growth. 

Its software gives clients functionality that can improve business management and increase efficiency. While revenue for infrastructure software rose 4% in Q2 2021, it surged 28% in fiscal 2020.

Its semiconductor solutions division has made a comeback in recent quarters. In Q2, semiconductor solutions revenue rose 20% from year-ago levels, a significant improvement compared to the 1% revenue decline for all of 2020 compared with 2019 levels. Broadcom’s Wi-Fi 6E platform has been a particularly solid performer. This router brings faster speeds and lower latency achieved through an increase in spectrum bandwidth. In the second-quarter 2021 earnings call, CEO Hock Tan stated that over 50 million ports shipped in Q2 alone, a year-over-year growth rate of around 30%.

Broadcom also continues to invest heavily in fostering its competitive advantage through research and development. It spent just under $5 billion on research and development (R&D) in fiscal 2020, just above the $4.7 billion spent in 2019 and the $3.8 billion allocated to R&D in 2018. These funds go to product development, process development, and process optimization. The company also employs engineers located near its primary customers. This collaboration often fosters ideas for what it calls “value-added, customized” products.

However, like many tech businesses, Broadcom declined to offer guidance past the upcoming quarter. For the third quarter, Broadcom provided guidance of $6.75 billion in projected revenue. That would represent a 16% revenue increase year over year should the projection hold. Nonetheless, the fact that it did not offer a fiscal 2021 prediction could point to slowness as the U.S. and other countries emerge from the pandemic.

Consider Broadcom for income

Broadcom offers its investors a high-yield, fast-growing dividend. Indeed, a 3% cash return may seem modest considering that achieving $50,000 in cash returns would mean owning more than $1.6 million of this dividend stock.

Nonetheless, Broadcom’s longer-term track record of growth could ease the concerns about the lack of fiscal 2021 projections. Moreover, if its massive payout hikes and stock price growth can continue, its cash yield and overall return could climb significantly over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.“>

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