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.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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%.

Bottom Line
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?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  2. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  5. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  6. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  7. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!