Broadcom (NASDAQ: AVGO) continues to stand out among tech stocks for its dividend. During its earnings announcement for the fourth quarter of 2023, it announced what has become an annual payout hike, raising the dividend by 14% to $21 per share annually.
Still, at a 1.6% dividend yield, it is not far above the S&P 500 average of 1.4%. That may leave investors questioning whether it is a buy for its payout or whether they should evaluate Broadcom based on its potential for stock price growth.
The Broadcom dividend
Admittedly, the dividend is likely essential to shareholders who have held Broadcom stock from the beginning. It launched its IPO in August 2009 under its former name, Avago Technologies. At a debut price of $15 per share, such investors earn a 140% dividend return.
Additionally, the payout has risen at least once yearly since Broadcom introduced its dividend in 2010. Since it typically raises the dividend by double-digit percentage points, it holds increased appeal when the stock pulls back and the yield rises.
That's not the case today, as Broadcom stock sells near record highs. Moreover, numerous other S&P 500 companies pay much higher yields. Even after earning considerable gains over the last 12 months, IBM offers a 3.6% dividend yield, which means investors do not need to leave the tech sector to find competitive dividend returns.
Broadcom's growth potential
Knowing that, the next question is whether Broadcom is worth pursuing for stock price growth. Here, the outlook appears brighter. Over the last 12 months, the stock rose more than 125% and increased by nearly 370% in the previous five years.
These increases occurred in the company's diversification into the software industry. Broadcom's original business is specialty semiconductors for businesses. The company employs engineers near its most prominent clients, building chips that meet customer needs. Consumers occasionally see the results, as Broadcom designed the Wi-Fi hotspot chip in Apple's iPhone.
The move into software occurred as purchases of CA Technologies and parts of Symantec's business took Broadcom into enterprise software and cybersecurity. Still, its most notable software purchase is arguably the purchase of VMWare, a $69 billion deal that closed in November. With that acquisition, an estimated 43% of Broadcom's revenue now comes from software.
Furthermore, Broadcom may not be overvalued despite its gains. At a P/E ratio of 40, the stock sells near its historical average valuations. Additionally, with the forward earnings multiple of 28, its significant profit growth appears on track to continue, boding well for new and longtime shareholders alike.
AVGO PE Ratio data by YCharts.
Should I buy Broadcom stock for the dividend?
At current levels, investors should consider Broadcom only if buying for growth. From a business standpoint, the company is firing on all cylinders, and the stock's price growth could undoubtedly continue.
However, the tech stock is less of a buy for the dividend at current levels. The dividend serves long-term shareholders well and may become more noticeable if Broadcom continues to hike the payout at current rates. Still, it would take several years of payout hikes before a current buyer matches the yield on IBM or other higher-yielding dividend stocks, making it less of a factor for new investors.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Broadcom and International Business Machines. The Motley Fool has a disclosure policy.
