For many investors, replacing lost income in retirement has become a top priority for their portfolios. Traditional income sectors such as utilities and healthcare have received renewed investor interest, and funds like the SPDR S&P Dividend (NYSE:SDY) have seen asset under management bloom. In seeking that income, the technology sector is often bypassed by dividend hounds. Synonymous with growth style investing, new high-tech devices, software and future equipment scream economic expansion, not steady dividends. However, that could not be farther from the truth. Plenty of opportunities in the sector pay handsome dividends. One such opportunity exists within the building blocks of all technology - semiconductors. (For more, see A Primer On Investing In The Tech Industry.)
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Growth and Dividends
While the sector is not known for outsized payments (the popular proxy for the sector, the PowerShares NASDAQ QQQ (Nasdaq:QQQ), only yields 0.73%), some tech companies are using their cash hoards to reward shareholders with something other than acquisitions. Forming the backbone of modern technology, the semiconductor subsector is one place where investors can find outsized dividend payments.
Our ever-more-complicated lives revolve around technology. It seems that everything we touch, from our cell phones to our toasters, has some form of microchip inside it. As this relationship with technology continues to advance, the long-term demand for semiconductors is assured. In the emerging world as incomes continue to rise, this bond with technology is just beginning. As these citizens embrace new healthcare devices, telecommunications equipment and consumer products, semiconductors will be a driving force.
Now could be the time to add the semiconductors to a portfolio. Recent weakness within the global economy has sent many stocks within the sector downward. Dutch semiconductor equipment manufacturer, ASML Holding NV (Nasdaq:ASML), highlighted this fact when it reported signs of slowing growth in the industry, excluding the technology needed to produce tablets and smartphones. However, in this slide, the semiconductor segment is now trading for dirt-cheap multiples. The broad iShares PHLX SOX Semiconductor Sector ETF (Nasdaq:SOXX) currently can be had for a price-to-earnings (P/E) ratio of 11 and a 1.4% dividend yield. In addition, the sector is growing those dividends.
Overall, the tech sector has increased its payouts by over 35% in 2011. The sector's value has not been lost on institutional investors either. More than $87 million in new money has flown into the SOXX since the end of September. (For more on sector-based ETFs, read Sector-Based ETFs Spread Out Risk.)
A Dose of Wafer Payouts
For investors, the semiconductors' long-term promise, coupled with its recent weak stock performance, makes it a compelling buy. The sector's generally high dividends are the icing on the cake. These payments can provide a cushion if another recession takes hold as well as provide extra "oomph" in a rising market. Here are a few individual semi picks with higher-than-average yields that could be great additions to a portfolio.
KLA-Tencor (Nasdaq:KLAC) is a semiconductor equipment and materials firm that features a high dividend (3.2%) as well as a low payout ratio (21%), meaning management has room to raise the dividend even more. The firm's debt load is also currently below the sector average. Shares of KLAC can be had for a P/E ratio of 9. In addition, equipment firm Applied Materials (Nasdaq:AMAT) can be had for a P/E of 7.6 and a 2.7% yield.
Some of the highest yields can be found in the contract manufacturers. Both Taiwan Semiconductor Manufacturing (NYSE:TSM) and United Microelectronics (NYSE:UMC) produce chips and wafers based on customers' own designs. The firms yield 3.4% and 6.9%, respectively.
Boring isn't necessarily a bad thing as sales and profits continue to grow at Analog Devices (NYSE:ADI). The firm makes the chips needed for various equipment to run, and it has reduced its share count by 25% during the last five years. Analog Devices still has plenty of cash on its books and trades for a P/E of 11.6. Shares yield 2.8%.
As technology continues to become more integrated into our lives, the real winners will be the companies providing the building equipment for the sector. By adding semiconductor producers, investors have a chance to play the backbone of technology. In addition, many of these firms offer strong dividend payments and can provide a great income opportunity at these levels. (To learn about dividends, check out How And Why Do Companies Pay Dividends?)
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