We don’t often think of high-growth semiconductor stocks as great dividend stocks, but that’s exactly what Broadcom (AVGO) is.
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I’m bullish on the $767 billion semiconductor giant and view it as an ideal stock for dividend growth investors despite its seemingly pedestrian 1.3% yield, based on its strong combination of impressive and consistent dividend growth mixed and incredible total returns over the years. Plus, analysts see significant potential upside of over 20% for shares over the next 12 months.
Avgo’s Dividend Growth Is Sustainable
Broadcom yields just 1.3%, which is about in line with the average yield of the S&P 500 (SPX). So, what makes this a compelling dividend stock? Well, there’s a very simple answer – its impressive history of dividend growth.
Broadcom has paid a dividend for the last 13 years in a row and has increased this payout in each of these 13 years. Additionally, the company has grown its dividend payout at an impressive 14.7% compound annual growth rate (CAGR) over the past five years. Additionally, Broadcom maintains a reasonable dividend payout ratio of 46.4%, so there doesn’t seem to be much risk of the company being forced to cut its dividend in the near future.
With this strong commitment to dividend growth, this rapid CAGR, and its modest payout ratio, investors buying the stock today can feel reasonably confident that Broadcom will continue to increase its dividend payout over time as its earnings grow, which we’ll discuss further below. Continued dividend growth looks likely, giving investors a far better yield-on-cost in the future on the shares they are buying today.
A Stunning Total Return Profile
Broadcom is also a compelling option for dividend growth investors (and all investors, for that matter) because of the stunning total returns it has generated for its shareholders over the years. Total return measures how much an investment has grown in value over time, combining capital appreciation and dividend returns. Broadcom is a good example of how a dividend stock with an average yield but strong performance can generate excellent total returns.
Over the past decade, Broadcom has delivered an incredible total return of over 2,100%. An investor who put $10,000 into the stock 10 years ago would have about $221,420 today. Most dividend investors would happily take that return despite Broadcom’s lower yield.
Of course, past performance is no guarantee of future results, and the law of large numbers means it will be much more difficult for Broadcom to deliver that level of return over the next decade, but Broadcom is clearly a long-term winner.
Long-Term Bullish Sentiment
Broadcom is also the right dividend stock to own for the long term. It is a leading semiconductor company, operating at the forefront of an industry analysts expect to grow significantly for many years to come. Plus, the company is projected to grow its earnings significantly in future years. For example, analyst consensus estimates call for Broadcom to grow its earnings per share from $4.85 for Fiscal 2024 to $6.20 per share in Fiscal 2025.
I would prefer to invest in a dividend stock like Broadcom that’s growing its earnings and is at the forefront of a high-growth industry instead of a stock with a higher yield but meager earnings growth prospects operating in a declining industry.
A Good Choice for Dividend-Oriented Funds
Broadcom’s compelling combination of dividend growth and total returns makes it a prominent holding for many top dividend funds, further confirming its stature as a top dividend stock. For example, Broadcom is currently the largest holding for the Vanguard High Dividend Yield Index ETF (VYM), a popular Vanguard fund with over $60 billion in assets under management (AUM) that focuses on dividend stocks with high yields.
You can check out a list of VYM’s top 10 holdings, including Broadcom, below via TipRanks’ holdings tool.
It’s also the second-largest holding for the popular Vanguard Dividend Appreciation ETF (VIG), another strong Vanguard fund with $89.3 billion in AUM focusing on dividend growth stocks.
You can also check out an overview of VIG’s top 10 holdings below using TipRanks’ holdings tool.
The fact that Broadcom is the top holding for a major high-yield ETF and for a top dividend growth ETF further illustrates that this is a strong dividend stock with something for everyone.
Is AVGO Stock a Buy, According to Analysts?
Turning to Wall Street, AVGO earns a Moderate Buy consensus rating based on 22 Buys, three Holds, and zero Sell ratings assigned in the past three months. The average AVGO stock price target of $200.32 implies a 23.6% upside potential from current levels.
Adding it All Up
I’m bullish on Broadcom as a top choice for dividend growth investors. The company has paid a dividend for 13 years in a row and has grown its payout each year. Plus, its strong history of total returns makes it a compelling long-term winner. Its combination of dividend returns and capital appreciation is hard to beat. There’s a reason analysts view Broadcom as a Strong Buy and that the stock finds itself as a top holding for several major, well-regarded dividend ETFs.
