With a forward annual dividend yield of 5.15%, Intel (NASDAQ:INTC) may seem at first to be a solid choice for income investors. At present, INTC stock has the highest yield among large-cap tech stocks.
But while collecting a steady 5.15% payout may seem tempting, keep in mind the risks. For starters, it’s debatable whether the chipmaker, experiencing numerous challenges in the near-term, will be able to sustain this level of payout. Much less, grow it over the next few years, after eight consecutive years of dividend growth.
Even if the dividend isn’t at risk of getting reduced/suspended, that still doesn’t make this a worthwhile dividend play. Intel stock could languish, or perhaps move slightly lower, resulting in subpar total returns for investors buying shares today. Let’s dive in, and see why this yield trap should be avoided at all costs.
INTC Stock: High Yield, High Risk
As the saying goes, “there’s no such thing as a free lunch.” In exchange for the opportunity to collect Intel’s 37 cent quarterly dividend, one has to assume the risks. Namely, the risk of a partial or full dividend cut.
In my last INTC stock article, I discussed the many industry and company-specific headwinds this leading semiconductor company is experiencing at present. These include the current softening in chip demand, due to the current economic slowdown, as well as competitive challenges.
The company is also embarking on an ambitious turnaround plan. Besides working to regain market share lost to rivals, Intel is also investing heavily in order to become a major chip foundry or a maker of chips for other chip companies. This expansion effort requires tens of billions in additional capital expenditure.
Management’s plan to aggressively slash operating costs will help counter this, but INTC is still stretching its cash flow thin. If the chip market downturn ends up being more severe than currently expected, the company may have to reduce/cut the dividend.
Lowering or eliminating the payout, one of the few perceived positives with INTC right now, could have a serious impact on its stock price.
Total Returns May Underwhelm
Even if you assume that the dividend is “safe” (given the cost-cutting plans, plus the company’s $22.6 billion cash position), don’t assume that it’s all uphill from here for INTC stock.
As you may recall, Intel shares have moved higher since October. After rallying after earnings, and due to the broad market recovery in November, resumed pessimism about the overall economy (and the company) could result in the stock re-testing its 52-week low ($24.59 per share).
Admittedly, downside risk beyond re-testing lows may be limited, if the dividend stays constant. However, collecting the 5.15% payout could be as good as it gets when it comes to total returns for INTC over the next few years. With little room for error, although management may maintain the present payout rate, I wouldn’t count on a dividend increase in 2023.
Meaningful share price appreciation does not appear likely, either. Investors are likely to maintain a “show me” approach with Intel, until the company’s turnaround plan begins to have a positive impact on its fiscal results. It may not be until 2024 that improved operating results arrive, if bearish forecasts from sell-side analysts like JP Morgan’s Harlan Sur play out.
The Bottom Line
Whether you are an income-focused investor, or simply seeking out more steady plays during this time of elevated market volatility, you have many great choices out there among top-tier dividend stocks. However, Intel stock is definitely not in that category.
High-quality dividend stocks offer not only yield, but the potential for both dividend growth, and solid share price appreciation, as well. In contrast, neither appears to be on the horizon for INTC. If that’s not bad enough, a dividend reduction/cut is not outside the realm of possibility.
Clearly a dividend yield trap, don’t waste your time, or risk your capital, on INTC stock. Resist the urge to chase its high-yield, and pursue the more promising long-term opportunities out there in today’s market.
INTC stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.