Why Intel Is Right for Your IRA
Apr 10th 2012 1:30PM
Updated Apr 10th 2012 1:32PM
This article is part of our Right for Your IRA series, in which Foolish writers each pick a stock or ETF that could be a great fit in a tax-advantaged retirement account.
In 2010 an estimated 45% of Americans paid no federal income tax. To the other 55% of you, rather than plotting how you can exact revenge on that 45%, how about I tell you a legal way you can reduce your future tax liability without winding up either in jail for assault or on the SEC's most wanted list.
What I'm talking about is opening, or making a contribution to, an individual retirement account. IRAs are great in that they, based on income and marital status, allow you to reduce your tax liability now or down the road. With so many types of IRAs, there really is a retirement plan for everyone. Although I can't decide which one is right for you, The Motley Fool has put together an article that compares the two primary types of IRAs: traditional and Roth.
Once you've made your choice, the real fun begins. That's because you're either stiffing Uncle Sam by keeping your hard-earned money until you're in your 70s with a traditional IRA, or you're letting your money grow completely tax-free in a Roth IRA.
Today I want to take a look at a company that I feel will provide you with a perfect balance of growth and dividends that even Donovan McNabb's Campbell's Chunky soup-loving mom would approve of.
The company in question is Intel (NAS: INTC) , and it has all of the tools needed to lay the foundation for a comfortable retirement.
For those of you who think Intel is a yesteryear story, let me ask you one question: What sort of processor do you think is in the PC, laptop, tablet, or other device you're reading this story on? Odds are you're thinking "Intel," as the company controls 83.7% of the microprocessor market as of the third quarter of 2011, according to marketing research firm IHS. Intel's primary rival, Advanced Micro Devices (NYS: AMD) , commands just 10.2% market share, down from 11.5% in the year-ago period.
Traders often like to speak of the eventual demise of Intel, but there's no denying that this semiconductor behemoth is always one step ahead of its competition. Let's take a closer look, for example, at the company's focus on tablets, smartphones, and cloud computing.
According to forecasts by Business Insider, the tablet market will grow at a compounded annual rate of more than 50% through 2015. With just shy of 100 million units sold last year, this growth forecast predicts that nearly 500 million units will be sold in 2015. These forecasts aren't so hard to believe when you consider that Apple's (NAS: AAPL) iPad sales are growing by triple digits on a year-over-year basis, and it sold 15.4 million units in the first quarter -- more than it moved in the entirety of 2011.
Even better, research firm NPD noted that the average selling price of smartphones has declined in four straight quarters. As with most technology, when the market gets flooded, ASPs respond by declining. As prices decline, unit sales should rise. This will mean more business for Intel, which is planning to dive headfirst into the tablet and smartphone market in 2012. Challenging ARM Holdings and its lock in the mobile-chip architecture will be no short order; Intel knows it needs to make serious inroads, and soon.
What Intel is expected to gain in smartphones and tablets, it is ceding to AMD in netbooks. Though netbooks were the hottest thing a few years ago, Intel quickly recognized consumers' move away from the miniature computers. Based on IHS's research, which indicated a 33% drop in shipments in 2011, it appears to have made a smart move.
The cloud is also another hot growth area for Intel. Its new Xeon E5-2600 server chip is revolutionizing data storage, with the biggest name in networking, Cisco Systems (NAS: CSCO) , already redesigning its servers around the new chip. Intel won't be able to walk right into the cloud hardware space and claim dominance, as Amazon.com's (NAS: AMZN) EC2 pay-as-you-go and S3 storage platforms are the cloud platforms on which other companies base their business, but Intel has a clearly successful line of products to accomplish the task.
Why Intel 30 years from now?
Despite the fact that you can trade in your IRA as frequently as you like, it is primarily built for long-term success, which is another reason Intel makes a lot of sense. You've seen above why I feel its business model will lead it to success. Now let me show you why its income stream is more or less unsurpassed in the tech sector.
I don't know about you, but I love free money, and Intel is dishing it out by the handful. Over the past eight years Intel's dividend has grown at a compounded annual rate of 34%! What's truly scary is that Intel's payout ratio (what it pays out as a dividend as a percentage of earnings) is just 35%, based on this year's projected annual dividend and last year's EPS, which leaves plenty of room for future growth. How would you like to climb this mountain?
Source: Dividata. 2012 dividend estimated by author assuming $0.21 quarterly payout.
Based on Intel's current yield of 3%, you would get a complete return on your investment just through dividend payback in 24 years, and that's not assuming you reinvest the dividends. In that case, your payback time would drop even more.
Intel offers the best of both worlds: You get to take advantage of the growth associated with new technologies without being held captive to falling average selling prices -- all while pocketing a top-of-the-line dividend. This tax season, you could do a lot worse than adding Intel to your IRA. On April 17, stick it to the tax man and show 'em who's boss!
Luckily for you, Intel isn't the only stock that could lead you to a comfortable retirement. Our Motley analysts have identified three stocks that could help you retire rich. Find out their identities for free.
At the time this article was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. He swears by Intel's processors in his electronics. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Intel, Apple, Cisco Systems, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Intel, Apple, and Amazon.com, as well as creating a bull call spread position on Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that's highly recognized for transparency.
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