The blue chips on the Dow Jones Industrial Average (DJINDICES: ^DJI ) are some of the biggest and most stable companies in the world. And one way they reward investors for owning them is by paying them dividends quarter after quarter.
Intel (NASDAQ: INTC ) doesn’t have a century-long history of paying dividends like DuPont or 3M, but it’s one of the best of a newer generation of dividends. Here’s why I think Intel is a dividend for investors to buy and hold.
Why Intel’s dividend rocks
When looking at dividends, it’s important to look at the payout along with the underlying business that generates cash for the dividend. In the following chart, you can see that the dividend itself (the orange line) has been increasing, but the two other lines show cash generated by the business and how much of that cash is paid out to shareholders.
<a href=”http://ycharts.com/companies/INTC/chart/”><img src=”http://media.ycharts.com/charts/0483150eb7c800bc6e22f97a78308c31.png” alt=”INTC Payout Ratio (TTM) Chart” /></a><p style=”font-size: 10px;”><a href=”http://ycharts.com/companies/INTC/payout_ratio”>INTC Payout Ratio (TTM)</a> data by <a href=”http://ycharts.com”>YCharts</a></p>
A payout ratio below 50% shows that Intel’s 3.3% dividend yield could double and the company would still be able to operate efficiently. But Intel is dumping money into R&D and capital expenditure, which it hopes will lead to growth in the future.
Set up for growth
The slow decline of the PC has hurt Intel; there’s no doubt about that. But what management has been investing in is the chips of the future. Intel will be the first to introduce 14 nm chips that are going to be targeted for smartphones, tablets, and wearable devices. There’s been a big effort to improve energy efficiency as well as increase speed and with momentum in signing new OEMs that are making Intel powered tablets the strategy appears to be working.
But where Intel will jump ahead of the competition is in wearables, which are the future for chipmakers. The “Internet of Things” is just getting started, and before long our watches, cars, glasses, and almost everything imaginable will be connected. If Intel can take a large share in this growing market it’ll add to strong positions in PCs and servers, ensuring cash flow for future dividends.
Foolish bottom line
Intel is no longer a hot growth stock, but with high margins and strong cash flow, it’s a dividend investor’s dream. Upside potential in new markets make me think that dividend is safe long-term and this is a great value for investors.
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