Broadcom (NASDAQ: AVGO) and Verizon Communications (NYSE: VZ) each plays a significant role in the wireless industry. Broadcom’s semiconductor chips and software help power broadband, while Verizon provides the service.
However, one can easily overlook how the two evolved into high yielding dividend stocks that pay well above the average. S&P 500 1.4% cash yield. Also, given the state of each company, the current performance of the stock market is unlikely to affect these payments.
Because it’s not a consumer-focused tech company, Broadcom may not be as familiar as other tech giants. However, he continues to develop products that support the industry.
Dividend investors benefit from its annual payout of $ 14.40 per share. It offers a cash return of around 3.3% and the payout has increased at least once a year since its introduction in 2010.
Given the strengths of Broadcom’s business, payment increases are likely to continue. Broadcom derives its revenues from two main divisions: semiconductor solutions and infrastructure software. In 2020 alone, Broadcom spent about $ 5 billion on research and development, a 6% increase from the previous year.
This investment helps Broadcom deliver solutions in areas such as data centers, broadband and server storage. However, the current cash cow is the next generation 6E Wi-Fi solution, a chip that offers faster speeds and lower latency. Such technology has helped the company secure multi-billion dollar supply deals with Apple and Samsung.
These successes enabled Broadcom to generate approximately $ 11.6 billion in free cash flow in fiscal 2020, an increase of 25% from 2019 levels. In addition, the $ 3 billion of Cash flow in the first quarter of 2021 represented a rate of increase of 36% compared to the quarter of last year. With around $ 570 million in interest and over $ 1.5 billion of that cash allocated to dividend payments in the first quarter of 2021, Broadcom should have no problems sustaining and increasing the payment.
Yet Broadcom faces tax challenges. Its total debt of around $ 41.9 billion looks of concern for a company with a book value of $ 24 billion. Also, the valuation of around 50 times earnings is much higher than its P / E ratio of nine three years ago, making it feel a bit expensive in a declining market.
Nonetheless, with its competitive advantages and rising cash flow, Broadcom is expected to continue to provide liquidity to investors regardless of the current direction of the stock market.
2. Verizon Communications
At first glance, Verizon doesn’t look like a potentially lucrative game. The company has long struggled to maintain its revenue and bottom line. Additionally, in the last quarter, the company revealed that debt increased by more than $ 29 billion from a year ago as the company invested heavily in spectrum licensing.
Nonetheless, market conditions continue to work in favor of Verizon and its dividend. News from this competitor AT&T (NYSE: T) will reduce its dividend likely means that Verizon’s 4.4% cash yield will now exceed AT&T’s payout yield.
Verizon’s annual payout of $ 2.51 per share has increased every year since 2007, and management has indicated those increases will continue. Verizon can keep up this pace. The $ 5.2 billion in free cash flow in the previous quarter helped Verizon cover $ 1.1 billion in interest payments and $ 2.6 billion in dividend payments.
Moreover, after initially buying AOL and Yahoo !, Verizon quickly realized that following AT&T in large media acquisitions would not work well. Therefore, he has now decided to part ways with Verizon Media.
Moreover, he did not invest as much in these losing companies. That means he could buy $ 45 billion worth of licensed spectrum at the recent auction, nearly double what AT&T spent. This spectrum will allow it to improve the quality of its coverage above its 5G offer nationwide.
Such coverage will also become essential as it evolves into a Network as a Service business. As CEO Hans Vestberg mentioned on Q1 2021 conference call, the company is creating a new revenue stream that Verizon can support more directly. AmazonEdge computing or Hondadriverless cars.
Additionally, income investors benefit from the fact that Verizon trades only 12 times its earnings. It comes way below T-Mobile United Statesmultiple of 55 (AT&T does not have a P / E ratio at this time).
Verizon faces challenges. The spectrum purchase brought its current debt level to nearly $ 159 billion, an increase of $ 30 billion in one quarter. Still, Verizon can cover interest and dividend obligations. Additionally, with a notable victory over AT&T and significant spending to grow its Network as a Service business, income investors are expected to thrive with this action in most market environments.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.