Investing in semiconductor stocks has proven to be a winning bet for investors over the past two years. When the use of everything from laptops to cell phones and data centers exploded during the pandemic, the companies making the world's fastest and smallest chips struggled to meet demand.
Since the March 2020 market crash, the benchmark has risen by more than 180%. Some of the largest chip makers, such as NVIDIA (NASDAQ:) and Advanced Micro Devices (NASDAQ:) also produced impressive returns that boosted their market caps.
There is no sign that this party will end any time soon. Taiwan Semiconductor Manufacturing (NYSE:), the world's most advanced semiconductor manufacturer, expects sales to grow by more than 20% in 2021. The company, which also supplies chips to Apple (NASDAQ:) and a key partner to many of the world's largest automakers, expects semiconductor supplies to remain tight through 2022.
But if history provides any clues, the chip industry is highly cyclical and supply-demand patterns are changing rapidly. The unprecedented surge in investment to increase supplies also fuels fears that the industry will overshoot, adding so much capacity in the coming years that it could seriously hit high-flying supplies. If you want to play it safe in this sector by buying less volatile stocks, we recommend that you consider Broadcom (NASDAQ:) stocks. Broadcom's wireless connectivity chips of San Jose are used in iPhones and other smartphones.
The silicon switches and custom designs are essential parts of data centers owned by cloud computing giants such as Google (NASDAQ:) and Amazon AWS (NASDAQ:). Broadcom is also a major supplier of silicon used in set-top boxes and home networking equipment.
Broadcom plays it safe
In an earnings report released last week, Broadcom again exceeded analyst expectations. In the fiscal year, which ended August 1, Broadcom's earnings rose to $6.96 per share, excluding some items. Sales rose 16% to $6.78 billion. Analysts had forecast earnings of $6.85 per share on revenue of $6.76 billion.
Fourth quarter revenue will be approximately $7.35 billion. That equates to an average analyst estimate of $7.23 billion. A distinguishing feature of Broadcom's growth strategy is that the company is preparing for an eventual slowdown in demand by not over-supplying to customers.
Chief Executive Officer Hock Tan told investors last Thursday that even with the demand for chips rising, the company is closely monitoring which orders it fills to avoid creating a surplus in the future.
"We can show larger numbers, but that means we'll be building supplies in the wrong places," Tan said. The company is "applying discipline to deliver" and focusing on where it's really needed, he said.
Broadcom's extensive reach across multiple sectors gives investors both a reliable income stream and additional upside potential. While Broadcom stocks have risen more than 120% over the past three years, so has the dividend. It has more than tripled, from $1.02 per share per quarter in 2017 to $3.60.
The stock is currently yielding about 3% – a return that is higher than the average return offered by companies.
Broadcom is in a strong position to reward its investors with hefty payouts going forward as demand for its chips remains strong. About 90% of Broadcom's 2021 delivery has already been ordered by customers. Normally, chip makers have locked up about a quarter of their stock this way.
Bottom Line
Broadcom is a growth stock that also pays a consistent dividend. The company's careful approach to absorbing future demand shocks, coupled with its dividend income, makes its stock a good choice for risk-averse investors.
