Qualcomm: Blue Chip for Dividends
05/08/2014 8:00 am EST
This month’s featured recommendation is the first taken from our newest investment advisory, Cabot Dividend Investor, a service designed for investors looking to develop a stable flow of dividends for their retirement years, suggests Timothy Lutts, editor of Cabot Stock of the Month.
Qualcomm (QCOM) is no longer the hot growth stock that made it a darling of aggressive investors in the 1990s. Instead, Qualcomm is now a big company growing at a moderate rate (10% annually for the next couple of years) and generating a growing stream of dividends at the same time.
This growing stream of dividends is what makes the stock particularly attractive for dividend investors, because it means that while the stock is yielding 2.2% today, investors who buy and hold (long enough) can expect to see their yield climb much higher on a cost basis.
Qualcomm, pure and simple, is the leading holder of patents for chips used in cell phones and other network-connected devices.
Qualcomm doesn’t manufacture chips, but it designs them, and its designs are used in over half of the smartphones and tablets made every year, including every major brand except Apple.
However, two-thirds of Qualcomm’s operating income comes from its other business: licensing. Qualcomm researchers helped develop the 3G and 4G/LTE networks used by today’s advanced mobile devices, and, as a result, Qualcomm now receives royalty payments for practically every device sold.
So, as long as the industry grows—and until some other company comes up with a leapfrog technology—Qualcomm will grow too.
As to the dividend, Qualcomm began paying quarterly dividends in 2003, and it’s increased its dividend every year since. The magnitude of the dividend increases is particularly impressive, averaging 29% per year since 2003.
Furthermore, back in November, management announced that they’re targeting a dividend growth rate greater than the EPS growth rate. That’s a very shareholder-friendly statement.
Technically, QCOM now acts like a blue chip stock with low volatility. So, the reason to buy is that Qualcomm offers very dependable moderate growth supplemented by growing dividends.
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