More Old Tech Dividends: Chips

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For years dividend investors couldn't tread into technology waters because there simply weren't enough companies in the space that paid dividends. Today it’s a very different story, with options available throughout the technology industry and across the market-cap spectrum. One tech sector that's currently out of favor is microchips, making it a great place to look for notable dividend yields.

The Economy Matters
While the economy is an issue for just about every industry, economic lulls can be particularly painful in the chip space. High ongoing costs are one of the big reasons for this sensitivity. Material research and development and equipment costs are additional negatives.

That said, when times are flush, these companies possess material operating leverage. Right now, the economy is weak and customer orders are sluggish, leading to weak share prices for even some of the best situated companies. Moving past the household names, below are few lesser known companies that are worth looking at in the space.

Microchip Technologies (NASDAQ: MCHP)
Spun off from General Instrument in 1989, Microchip Technologies is a leading supplier of microcontrollers (MCUs). MCUs perform relatively simple tasks and are found in such household items as remote controls and refrigerators. Although commodity items, to some extent, contracts for these chips are often long-term in nature because of the product changes that would be necessary to accommodate an MCU chip change.

As such, these chips tend to have long product lives and, thus, decent margins. Microchip Technologies has a solid business in the 8 bit space, but lags competitors in the more modern 16 bit and 32 bit areas. This isn't inherently a big deal today, but it is an issue for longer term growth.

Continued economic weakness has been a major issue for the company of late, as its customers sell their products to the general public. If the everyday consumer pulls back, so, too, do Microchip's customers. This, plus additional debt taken on to fund a recent acquisition, have put downward pressure on the shares. The company remains financially sound, however, and its dividend appears secure. With a 4% plus yield, this could be a good option for investors willing to wait for an economic turnaround.

United Microelectronics Group (NYSE: UMC)
Founded in 1980, United Microelectronics claims to be Taiwan's first semiconductor company and the second largest microchip foundry in the world. As a pure foundry, the company focuses its energy on owning the factories that make semiconductors, but does not design them. Its customers, then, include such well-known chip designers as AMD (AMD) and Xilinx (XLNX). This leaves United Microelectronics to focus on ensuring that its factories are cutting edge. Today, it can support 28nm processes, mixed signal/RFCMOS, and “a wide range of specialty technologies”. The company has ten manufacturing facilities. 

At the end of the third quarter, management suggested that the close of 2012 would be relatively weak. The weakness, however, is industry related, since the chip industry is currently in a downswing. That said, buying straw hats in the winter when they are cheap and selling them in the summer when they are dear has always been a good businesses decision.

At the end of the day, United Microelectronics is a good company that is up against stiff competition from a larger rival, Taiwan Semiconductor (TSM), which it has lagged for years. Still, with little-to-no debt and plenty of cash in the bank, the company is going to be a long-term survivor. When the chip market turns, United Microelectronics is likely to benefit. In the meantime, investors can pocket the near 3% dividend.

STMicroelectronics NV (NYSE: STM)
STMicroelectronics is the largest chip maker in Europe. Unlike the other two chip makers noted above, STMicroelectronics' operates in a vast array of categories, giving it a material level of diversification. The company is the result of the 1987 merger between SGS Microelettronica of Italy and Thomson Semiconducteurs of France. The company's key markets include sense and power technologies, automotive products, and embedded-processing solutions.

A struggling joint venture, which the company has been working its way out of, and weak economic conditions in Europe have been material drags on STMicroelectronics' results of late. Although the company is broadly diversified by product and region, operating out of Europe has left with a relatively large exposure to the region. That's an extra overhang on the stock given that the old world has been a notable laggard for the last year or two.

Although the company has a high debt load, it also has a large cash balance, so, overall, it appears to be in decent financial shape. The recent yield of 4.7% could make it an interesting investment candidate for dividend investors looking for broad chip industry exposure.

Tech dividends
Income investors looking to add technology exposure have plenty of options today that simply didn't exist a decade ago. It's worth taking a look at the industries leaders, like Microsoft (MSFT) and Intel (INTC), and companies that you may never have heard of, like some of the names above.

Yours,

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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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