Income

Looking for $5,000 in passive income? Buy just over 1,000 shares of this stock

Investors love dividends. Who doesn’t like getting paid to own something while you’re doing nothing? They are also popular among retirees, providing a steady stream of income without the need to sell assets.

While eye-popping dividend yields of 6% or more are tempting, they generally indicate a struggling company that may have difficulty sustaining its current dividend level in the future. Investors should look for stocks offering a yield of between 2% and 4%, as this level is likely to be sustainable. A stock that meets these criteria is Texas Instruments (TXN 1.19%)one of the strongest dividend payers in the market.

With an annual payout of $4.60 per share, it takes 1,087 shares of Texas Instruments to receive $5,000 in dividends. So, is Texas Instruments worth investing so much money in today’s market?

A simple but vital product line

Even if you’ve never heard of the flea shortage, it’s probably affected you. Whether it’s a car, a phone, or a vacuum cleaner, there’s a good chance the device contains a Texas Instruments product. Texas Instruments does not produce the most powerful or advanced chips; instead, it focuses on analog and integrated semiconductors that perform basic operations. This category of chips is vital for essential electronic functions and won’t become obsolete anytime soon.

When investing, you sometimes don’t need to buy cutting-edge companies; instead, you can focus on legacy players who excel in their industry. That’s what you get by investing in Texas Instruments.

The chip shortage has affected all segments of the economy. To combat this, Texas Instruments will invest $3.5 billion per year in the United States to expand its chip manufacturing capabilities through 2025. From 2026 to 2030, its investments will total approximately 10% of annual revenue. . This is a massive investment in domestic chip production. But how will shareholders fare?

Image source: Texas Instruments. Photo of executives working at a new semiconductor plant in Sherman, Texas.

Steady dividend growth

If companies paid all their profits to shareholders, there would be no more capital to invest in the company. Instead, Texas Instruments buys future revenue growth by investing in its production capacity. The company has estimated that its total investments will drive annual revenue growth of 7% from 2030 into the future.

This sales growth will be key to future Texas Instruments dividend increases. Texas Instruments is not a dividend aristocrat, meaning a company that has paid and increased its dividend every year for 25 years – this is only the 18th year of increasing the dividend. But it has always paid a dividend since 1962. Moreover, it has increased its dividend at an average annual growth rate of 25% since 2004. In 2021, Texas Instruments increased its dividend by 13% while paying only 62% free cash flow.

While these statistics are interesting, what do they mean for investors? First, its payment is durable. Because Texas Instruments doesn’t funnel all of its remaining money into dividends, it can spend its money on other things, like building new factories. Second, dividend growth is a secret weapon for long-term investors.

Suppose you buy a single stock of Texas Instruments with an annual dividend of $4.60 per share. If Texas Instruments increases its dividend by 10% per year, in 10 years that dividend will have increased to $11.93 per share. If you’ve held out for a decade, your initial investment is no longer yielding a 2.85% return; instead, it would yield a 7.4% return on your initial investment.

Admittedly, these are hypothetical future numbers, but Texas Instruments is a company ready to deliver these results. Its sales growth for the first quarter was a respectable 14%, but its net profit grew even faster at a pace of 26%. However, Texas Instruments gave a gloomy outlook, giving a wide range of second-quarter revenue ($4.2 billion to $4.8 billion) due to COVID-19 restrictions in China. Depending on how the business performs, this could result in lower revenue from second-quarter 2021 sales of $4.58 billion. This pessimism is reflected in the company’s valuation.

Table of TXN PE ratios

TXN PE Ratio Data by YCharts

At 18 times its earnings, Texas Instruments is approaching a low reached only a few times in the past decade. This valuation makes the stock relatively cheap and investors shouldn’t worry too much about the valuation.

While some worry about a recession, Texas Instruments investors should rest easy. Due to chip shortages, Texas Instruments’ products are in high demand. Therefore, any reduction in demand from consumers spending less during a recession will allow Texas Instruments to return to normal operating conditions.

Texas Instruments is a great buy for those looking for a solid dividend payer. Demand for its products does not stop, and future growth should make it a superb addition to investors’ portfolios.