Seeking Alpha
Long only, deep value, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)  

So far, we've looked at mostly consumer staple stocks like Philip Morris (NYSE:PM) and McDonald's (NYSE:MCD) in this series. But Intel's (NASDAQ:INTC) recent dividend increase announcement makes it a good candidate for evaluation. Intel is one of the rare dividend increasing technology companies out there.

Let us take a look at some basic facts about Intel's dividends:

  • The company has been paying dividends every year since 1996 and has been increasing the payouts each year
  • Intel has a tendency to increase dividends more than once a year, as shown in 2011
  • The last five increase (not five years strictly) has an average of 12%
  • The payout ratio sits at a comfortable 36%, giving it great room for further increase in the future

As in the earlier exercises, let us look at the power of dividend growth for an investor who can set aside his/her money for 10 years in Intel.

  • Assume you purchase 1,000 shares at the recent price level of $28 for a total initial investment of $28,000.
  • The current yield works out to a reasonable 3.2% as shown in the table below.
  • Even though the average dividend increase has been about 12% so far, let us use a more conservative 8% for this calculation.
  • Notice how the dividend payments and the yield on original cost more than double in 10 years, leading to about $2000 in annual dividends for 1000 shares.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • Capital gains will almost certainly contribute to the overall returns as well. Intel has long been stuck in a trading range of $18 to $22 but the recent breakout augurs well for the future. The stock has seen heights not seen in a long time.
  • However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • One might think why not purchase a current yielder instead of waiting for Intel to grow into a high yielder in the future. Fair question. Unless a depression sets in, Intel is highly unlikely to reduce its dividend. The same cannot be said for junk high yielders.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

(click to enlarge)

Conclusion: Intel has shown a great promise of developing into a dividend growth champion. The current stock price might seem a bit high but even purchasing at today's level has a high chance of generating great returns over the years as the table above shows. However, this piece by Mr. Norman Tweed gives a better entry point for those who are waiting.

Source: Intel And Its Dividend Growth

Additional disclosure: May start accumulating Intel at $25 and below.