Investors should take advantage of this pullback and add high-quality dividend growth companies.
Yields above 5% on short-term Treasuries look very attractive right now, but don't expect them to stay that way. As inflation eventually falls toward the Federal Reserve's 2% goal, yields on “risk-free” bonds will also fall.
However, high-tech growth stocks can pay dividends that increase each year if the company's earnings per share also grow.
It's even more appealing when you think beyond the short-term horizon. That's why investors should take advantage of the recent selloff in tech stocks to scoop up long-term winners.
taiwan semiconductor manufacturing
The world's largest foundry, taiwan semiconductor manufacturing (TSM -3.45%), boasts a strong technological lead in complex chip manufacturing. In fact, all of today's artificial intelligence chips will probably pass through his TSMC foundry.
However, despite its strong position and strong sales and earnings growth in the first quarter, TSMC's stock price has fallen back and is now about 20% below its recent high. Perhaps that's because TSMC actually lowered its full-year 2024 forecast for semiconductor industry growth from over 10% to just around 10%.
But the reaction to this seems overdone. First, the previous guidance reduction was almost entirely related to one subsegment of the market: the automotive chip market. The market was strong after the pandemic until 2023, but is now experiencing the downturn that the PC, smartphone, and data center markets experienced in 2022-2023.
Other than that, things seem to be going well. In fact, given TSMC's leading position, he reaffirmed his growth target for this year in the low-to-mid 20% range. TSMC's huge growth is fueled by the artificial intelligence chip market, with TSMC expected to grow at an impressive compound annual growth rate of 50% over the next five years, from the current single-digit percentage of TSMC revenue to 2028. It is expected that this will increase to more than 20% by then. So while this comment may have been negative for some other chipmakers, there wasn't much reason for TSMC to be sold.
Meanwhile, the company is currently curbing capital expenditures after making large investments in the past few years. Despite forecasting revenue growth of more than 20% this year, TSMC expects to spend about the same amount on capital expenditures as it did last year.
That boosted free cash flow to about $8 billion in the first quarter, far exceeding the company's $2.5 billion in dividend payments. However, given that the company expects to ultimately pay out 70% of its free cash flow as dividends, TSMC has plenty of room to increase its current 1.6% dividend.
tencent
Some people are giving up on investing in China, and that's understandable. U.S.-China relations have deteriorated, trade has slumped, and the government's coercive approach in recent years has led to slower growth and forced sales of Chinese tech companies.
still tencent (TCEHY 0.10%)Arguably China's highest quality and most defensive tech giant, the company just increased its dividend by 42%. The company plans to more than double its share buybacks next year.
This performance is a result of technology companies accustomed to slow but perhaps steady growth, with an emphasis on cutting costs and rewarding shareholders with cash profits rather than reinvesting in growth at all costs. This is probably due to the fact that
Image source: Getty Images.
Despite the backdrop of economic recession, Tencent still achieved 7% revenue growth last quarter, which is certainly not terrible. Additionally, the company's cost-cutting measures and focus on profitability increased its gross profit by 25%, and adjusted (non-International Financial Reporting Standards) operating profit by an even more impressive 44%.
These results aren't too bad for a large company operating in China's economy, which is essentially in recession. And for a company trading at just 16.5x earnings, this isn't really bad. Furthermore, if you subtract Tencent's investments in other companies (total of about $125 billion), the P/E ratio is extremely low at 10.8 times.
Tencent's current dividend yield is just 1.1%, even after rising 42%. But with an empire spanning mobile gaming, social media, electronic payments, and cloud software, we expect that yield to grow significantly as Tencent grows its revenue and reduces its share count over time.
microchip technology
As TSMC noted in its conference call, the automotive and industrial chip sectors are currently in a downturn.it affects microchip technology (MCHP -3.00%)is a leader in microcontrollers and analog chips, generating 41% of its revenue from industrial customers and an additional 17% from automotive.
However, investors may want to take advantage of this downturn and take a position in this long-term winner. Microchip has a 30-year history of earnings growth, growing operating income at an average rate of 15.5% over 30 years. And Microchip was still able to achieve an operating margin of 41.2% last quarter, despite a significant drop in revenue. So Microchip appears to be a competitive winner despite a short-term downcycle. Still, automotive and industrial chips should see long-term growth as industrial equipment and cars and trucks become smarter and more electric.
Meanwhile, Microchip has spent much of the past six years paying down $7.1 billion in acquisition debt after making a major acquisition in 2018. As Microchip's debt burden decreases, the company is increasing the proportion of its free cash flow that it uses for dividends and stock buybacks. Last quarter, the company allocated 82.5% of its free cash flow to shareholder returns, and dividends increased 25.7% year-over-year. Management aims to increase shareholder dividends as a percentage of free cash flow by 5 percentage points each quarter.
Therefore, Microchip's dividend yield, which currently stands at just 2.1%, will rise further as the company ultimately distributes 100% of its free cash flow to shareholders by next year, increasing its earnings over the long term. You are expected to do so.
