Most people discussing Broadcom (NASDAQ:AVGO) stock focus on artificial intelligence, and rightly so. The premier mobile chipset maker in recent periods turned its attention to data center infrastructure, such as Ethernet switching and routing silicon.
Broadcom stock is seeing tremendous growth from AI chip sales. Custom AI accelerators and merchant networking chips led AI chip sales to jump 35% in the second quarter.
Broadcom guides AI chips to bring in $11 billion in revenue this year, or 25% of total sales, up from 15% in 2023.
Management increased its full-year revenue guidance to $51 billion and virtually all of it will be driven by AI. Indeed, non-AI chip sales are falling; they’re down 30% year-over-year in the second quarter.
That is reflected in Broadcom stock, which is up 36% in 2024 and is 70% higher over the past year. It has been one of the best-performing stocks in all the S&P 500 over the past decade with shares up more than 2,000%.
Yet zeroing in on the chipmaker’s AI business ignores one of the best reasons to buy Broadcom stock: its dividend.
Rewarding Shareholders With Massive Dividend Growth
The Broadcom stock dividend yield is currently 1.4% but its recent history shows its starting yield has seen it average around 2.6% annually. While it is comparatively low now, its yield on cost over time has grown exponentially.
If you bought Broadcom stock today, you would get the 1.4% yield. But had you bought it a year ago, your yield on cost would be 2.4% and if you bought it five years ago it would stand at 7%.
Someone with the foresight to buy shares a decade ago would see his yield on cost standing at a whopping 29.8%!
Had you bought $1,000 worth of Broadcom stock back then, it is equivalent to getting almost $300 a year in dividends. If you reinvest your dividends, it magnifies the growth significantly.
Broadcom has grown its payout at an accelerated 13% compounded annual growth rate over the past three years. Over the past five years it is a 15% CAGR while over the last 10 years, it is an incredible 35% CAGR.
It went from paying 3 cents in 2014 to 53 cents today (post-split).
A Perfect Union: AI, Mobile Chipsets and Dividend Growth
So we can see owning Broadcom stock anytime over the past decade has richly rewarded shareholders. It has been a dividend growth investor’s dreaming holding. But is it still a good stock to buy now?
Well, that’s where the discussion of Broadcom’s AI business begins.
As I noted above, the chipmaker’s data center infrastructure is growing. Broadcom keeps adjusting higher just how much the technology will be worth to the company in the coming year. That shows no sign of slowing down soon.
And yet the market has sold off the stock. Shares are down almost 20% from their recent high. Investors are signaling a shift from former momentum plays to small-cap stocks and consumer-oriented investments.
When it comes to Broadcom stock, that may be shortsighted. The company is a power player in the mobile chipset market with major customers, including Apple (NASDAQ:AAPL) and Samsung.
The former represents 20% of revenue and last year it signed a multibillion long-term contract with Apple to supply it with chips.
The Bottom Line on Broadcom Stock
Having secured its base, CEO Hock Tan told analysts during the company’s earnings conference call that “seven of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions.”
Ethernet switching should become even more important moving forward and tough to take more market share within the generative AI framework. Broadcom is on solid footing in its operations and its finances.
If the market is giving investors a discount on Broadcom stock, they should take advantage of it by buying this dividend growth leader.
— Rich Duprey
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Source: Investor Place