3 Reasons Texas Instruments Incorporated Is a Top Dividend Stock

By Markets Fool.com

The technology sector contains quite a few dividend stocks. This might be a surprise, since technology companies traditionally were reluctant to pay dividends to shareholders, preferring instead to retain as much cash as possible to reinvest back into the business. But tech stocks can provide good dividends. One of them is chipmaker Texas Instruments .

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Texas Instruments makes processors, and the company has built a very focused, and highly successful, business over the past several years. It derives the vast majority of its revenue from two specific markets, analog and embedded processing, 82% to be exact. And this has worked out big time for dividend investors. Texas Instruments has raised its dividend for 10 years in a row and has paid dividends to shareholders uninterrupted since it first began making dividend payments in 1962.

The company increased dividends by 43% last year, and followed up with a 13% dividend raise earlier this year. The company currently has a dividend yield of 2.6%, according to S&P Capital IQ data. The dividend currently is $0.34 per share per quarter.

Here are three reasons why Texas Instruments is a great dividend stock.

Reason No. 1: Above-average dividend yield
It's certainly true that technology companies have widely embraced dividend payments to shareholders in recent years. But the sector isn't known for high yields. A few big tech dividend stocks offer yields just on par with the overall market, like Apple, which yields 1.7%. Texas Instruments' 2.6% dividend yield is attractive in comparison to other tech stocks, and well above its peer group.

Texas Instruments has done a great job of growing its dividend at high rates. Management is committed to returning a lot of the company's free cash flow to shareholders, and dividends play a big role in that. Texas Instruments has increased its dividend by 23% compounded annually over the past five years.

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Reason No. 2: Generating cash and returning cash
Texas Instruments states to investors on its investor relations web site that it is "in a uniquely strong class of growing companies that both generate and return cash." This is evident from Texas Instruments' strong earnings over the past year. Texas Instruments grew revenue by 8% last quarter, but the company's cash-generating abilities are truly impressive. Texas Instruments' trailing-12-month free cash flow jumped 20% from the previous year. Free cash flow is being generated by rising profits and falling capital expenditures.

Texas Instruments is benefiting from the core operating strategies put in place over the past several years. Among these was management's decision to unload underperforming areas of the company, such as its legacy wireless business, to instead focus on its core competencies. Texas Instruments is now virtually out of the wireless business completely. Its remaining core areas of focus have high-value assets and products, with long life cycles.

It's clear that this has worked. Between 2009 and 2013, Texas Instruments' analog and embedded processing businesses grew revenue by $2.5 billion, or 9% compounded annually. The decision to streamline the company's focus was a very good one, and has created sustained revenue and free cash flow growth, which management returns to shareholders. From 2008-2013, Texas Instruments returned more than 100% of its free cash flow to its investors through dividends and share repurchases.

Reason No. 3: Double-digit dividend growth potential per year
Going forward, it's not inconceivable to think Texas Instruments can deliver double-digit dividend growth each year. Capital expenditures are likely to keep declining. Texas Instruments credits its falling expenses to its practice of opportunistically purchasing manufacturing assets at cheap prices. Plus, free cash flow will benefit from continued growth in profits. Management expects $3.13 billion-$3.39 billion in revenue this quarter. That would represent 9% growth, which means there's no sign Texas Instruments is in danger of slowing down.

Investors on the hunt for a strong dividend stock in the technology sector should keep Texas Instruments and its rock-solid dividend yield in mind.

The article 3 Reasons Texas Instruments Incorporated Is a Top Dividend Stock originally appeared on Fool.com.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.