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Earn 5 Percent Dividends From Texas Instruments Stock in 5 Years

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Tuesday, 23 October 2018 01:40 PM Current | Bio | Archive

Yield on cost is an important metric that income investors should consider when buying dividend stocks.

While many investors tend to focus on a stock’s current dividend yield, yield on cost reveals the benefits of buying and holding dividend growth stocks over the long-term.

High-quality dividend growth stocks allow investors to benefit from the magic power of compounding interest. Tech giant Texas Instruments (TXN) is an example of a stock that increases its dividend at high rates each year, and can provide buy-and-hold investors with a 5.0% yield on cost in 5 years.

Why Yield On Cost Matters

The current dividend yield is simply the per-share annual dividend, divided by the stock price. Meanwhile, yield on cost is the current dividend per share divided by the investor’s cost basis. The current yield is easy to calculate. For example, Texas Instruments currently pays an annual dividend of $3.08 per share. As a result, the current stock price of $99.72 means investors buying the stock today will earn a dividend yield of 3.1%.

Meanwhile, yield on cost depends on the price paid, as well as other factors such as if dividends have been reinvested throughout the holding period. By reinvesting dividends, investors use their dividend payments to buy more shares, which results in greater dividend payments, and so on. Yield on cost can also differ from the current yield, if the company’s dividend has been increased or decreased since the original purchase.

Texas Instruments can give investors a high yield on cost over time, through increased dividends and dividend reinvestment. The company has increased its dividend for 15 consecutive years, including a 24% increase in 2018. Over the last five years, it has raised its dividend by 21% per year on average. The company’s high dividend growth rate over the past several years is due to its strong earnings growth.

Competitive Advantages Fuel Impressive Growth

Texas Instruments operates in the semiconductor industry. It manufactures analog and embedded processors, primarily for the automotive and industrial markets. One of the company’s strongest competitive advantages is that it has among the most diversified portfolios of analog and embedded processing equipment, and holds a tight grip at the top of its core markets. The company has approximately 100,000 customers around the world.

Another competitive advantage is the company’s differentiated manufacturing strategy. Texas Instruments is a serial acquirer of smaller companies. Its goal is to purchase long-lived manufacturing assets on the cheap. By keeping its production in-house, rather than outsourcing it, Texas Instruments has a cost advantage, and greater control of its supply chain.

These competitive advantages have led to strong growth over the years. Texas Instruments generated free cash flow of $4.7 billion in 2017. Since 2004, the company has grown free cash flow at an 8% compound annual rate. Strong free cash flow generation fuels the company’s cash returns to shareholders. In addition to raising its dividend for 15 consecutive years, Texas Instruments has utilized share repurchases to reduce its share count by 43% since 2004.

If Texas Instruments raises its dividend by 10% per year over the next five years—less than half its five-year average dividend growth rate—it will pay dividends of $4.96 per share in 2024. Therefore, investors who buy the stock at the recent price of $99.72 will earn a yield on cost of roughly 5.0% in five years. This does not include reinvested dividends, which means investors who accumulate more shares with their dividends will have an even higher yield on cost in five years. And, the yield on cost would be higher if Texas Instruments exceeds a 10% annual dividend growth rate going forward.

Yield On Cost Shows The True Power Of Dividend Growth

Two stocks might have current dividend yields today, but provide completely different yields on cost over time. Texas Instruments’ current yield of 3.1% might not seem too impressive, but for investors willing to be patient, could provide a 5.0% yield on cost (or more) in just five years.

Yield on cost shows how high-quality dividend growth stocks like Texas Instruments can greatly reward investors who buy and hold over the long run.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
 

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BenReynolds
Texas Instruments’ current yield of 3.1% might not seem too impressive, but for investors willing to be patient, could provide a 5.0% yield on cost (or more) in just five years.
dividends, texas, instruments, stock
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2018-40-23
Tuesday, 23 October 2018 01:40 PM
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