A Lifetime of Passive Income? This Artificial Intelligence (AI) Stock Just Raised Its Dividend 15%, With Lots of Room to Grow.

When you're young, your investment goals revolve around growth. In retirement, those goals change to income. But if you are, say, a decade or two from retirement, your priorities are balanced between the two.

Thus, the decades leading up to retirement is a great time to buy dividend growth stocks. If a company is profitable and has a path to a decade or more of growth ahead, the compounded dividend payouts can become quite large once you hit retirement age.

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The catch is that dividend growth stocks often have current yields that don't exactly wow investors. However, the recent pullback in the market has increased some companies' yields significantly, merely by virtue of their stocks going down. That makes the following company look like an ultimate retirement stock for Gen X and millennial investors today.

Applied Materials is a cash flow machine

Semiconductor stocks have been long-term winners in the stock market, though investors have to be selective. Chip designers' fortunes can change drastically if and when there's a big technology shift and competition emerges. Meanwhile, chip manufacturing can be quite capital-intensive, limiting the amount those companies can return to shareholders.

But semiconductor equipment stocks -- the companies that make machines that manufacture chips -- have less risk than chip designers and lower capital intensity than foundries. "Semicap" equipment providers usually grow along with the semiconductor industry, which should be well above GDP over the long term. Meanwhile, this sub-sector is also highly concentrated to just a few big players with high margins and cash flows.

Applied Materials (NASDAQ: AMAT) is the most diversified of the equipment suppliers, and just announced a big dividend hike and share repurchase program. Yet the stock is also down some 40% from its highs last summer, and its current dividend yield has risen above 1%. With years of AI-fueled growth ahead of it, the stock is making a good case for dividend growth investors to scoop up shares today.

Applied delivers a 15% dividend increase, $10 billion buyback

Last Monday, Applied announced it would increase its quarterly dividend from $0.40 to $0.46 per share, an increase of 15%, which will be made on June 12 to shareholders of record as of May 22. In addition, Applied's board of directors approved a new $10 billion repurchase program, in addition to the $7.6 billion remaining on its already-existing program.

That's a big hike in shareholder payouts, even though management's enthusiasm is at odds with the current market sentiment. In fact, Applied's stock is down about 40% from its July 2024 highs. That's a pretty severe decline, especially since Applied is still reporting consistently good numbers. Last quarter, the company grew revenue 7% and adjusted (non-GAAP) earnings per share by 12%. And analysts project nearly 10% earnings growth over each of the next two years.

Applied's yield has spiked, making for a nice entry point

The dividend hike coinciding with Applied's stock price decline has grown its forward dividend yield to about 1.25%, its highest yield in a while. Usually, when Applied's dividend yield spikes in such a fashion, it has typically been a good time to buy the stock (note: the dividend yield below doesn't take into account the recent increase.)

AMAT data by YCharts

Moreover, that dividend yield is very well-covered by earnings. In fiscal 2024, Applied earned $8.65 per share, covering the new $1.84 dividend 4.7 times over.

And not only that, but Wall Street expects the next two years to see earnings growth as well, with an average EPS estimate of $9.37 this year and $10.11in fiscal 2026.

Applied's business should continue to grow with AI

Applied has a strong position in etch and deposition equipment, which is important to producing today's most leading-edge logic chips, as well as high-performance DRAM. The AI revolution needs lots and lots of both, which should bolster Applied's growth in the medium-term and its dividend along with it.

In addition, Applied makes metrology equipment that tests all kinds of chips, and ion implant equipment used in the production of lagging-edge power chips for autos and industrial end-markets.

With a diversified portfolio and a strong services business, Applied looks set to profitably grow along with the chip industry, all while reducing its share count via share repurchases. That's a recipe for dividend growth well above the rate of inflation for many years. Looking past the current volatility and out 10 to 20 years from now, Applied' payout could become substantial.

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Billy Duberstein and/or his clients have positions in Applied Materials. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.