Could This Be the Market's Safest Big Dividend?
Oct 15th 2012 4:35PM
Updated Oct 15th 2012 4:44PM
As a beginning investor, I was fascinated with the concept of dividends.
"Own a piece of the company, and get paid for it? Don't mind if I do!"
I searched the Internet up and down looking for companies that were paying huge dividends.
Over the past week, I've been spending time showing investors -- especially those just starting out -- how dangerous it can be to narrowly focus on the size of a company's dividend yield. Specifically, I recently highlighted Roundy's (NYS: RNDY) , a Midwestern grocer with a 15.8% yield, which appears to be paying out a dividend that is unsustainable.
This has led some to ask: "Are there any big dividends that are worth buying?"
My response is simply that nothing is guaranteed, but by carefully looking at the information available, we could pick out some candidates that appear to offer safe, large dividends. Today's candidate is Intel (NAS: INTC) .
Read below to find out if Intel is a safe bet for your money, and at the end of the report, I'll offer up access to a special premium report on Intel that dives much deeper into the company than I can in this one article.
First, let's look at the business
There's little doubt that Intel is one of the most financially successful companies of the last half-century. Investors who bought into the company when it went public in 1972 have seen a 163,000% increase in value, including dividends reinvested. That's good for an annual return of about 35%.
As impressive as that is, the market cares more about what the future holds, rather than what happened in the past. There's no question that Intel dominates its established markets in the desktop and PC realm. In terms of microprocessors, Advanced Micro Designs (NYS: AMD) is the only other major competitor.
But if Intel wants to continue to remain relevant, it needs to make significant headway in the mobile market. The company is trying to make headway with its new Atom mobile chip, but it is also facing competition from AMD and mobile market leader ARM Holdings (NAS: ARMH) .
How this all shakes out remains to be seen, and the picture is likely to change in rapid fashion as technology evolves. One thing I've noticed that gives Intel hope to adapt is its policy of keeping the design and manufacture of chips largely in-house. As innovation guru Clayton Christensen noted, companies that outsource production eventually end up outsourcing everything, and losing their competitive advantage. Intel has consciously made the decision to ignore this industrywide trend.
And now, let's investigate the dividend
Unlike the business outlook, which seems pretty unclear at the moment, the dividend picture is much easier to see. If Intel were to continue to increase business even slightly moving into the future, its 4.2% dividend is more than healthy.
There are many ways to measure the health of a company's yield. Two of my favorites are the earnings payout ratio, and the free cash flow payout ratio. The first measures the total amount of earnings used up to pay dividends to shareholders.
If the ratio is low -- say, below 50% -- that's good news. It means that if there's a rough economic patch, the company will likely be able to continue paying the dividend. And if business continues as usual or improves, there's lots of room to grow the dividend. Intel's current earnings payout ratio is a healthy 36%.
Then there's the free cash flow payout ratio. Because earnings include calculations like depreciation and amortization, it's not really an accurate picture of how much money is coming in and going out from a company's account.
That's why free cash flow -- which doesn't worry about such esoteric numbers -- is so valuable. Using free cash flow, Intel's payout ratio is 45% -- a little bit higher than the number we got from earnings, but still low nonetheless.
A final verdict?
When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.
The article Could This Be the Market's Safest Big Dividend? originally appeared on Fool.com.Fool contributor Brian Stoffel has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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