2 Top Dividend Stocks to Buy in September

The best dividend stocks usually share two traits: durable business models and plenty of free cash flow. When you find those qualities in tech companies riding the data center boom, you can get both income today and growth potential over time.

Texas Instruments (NASDAQ: TXN) and Qualcomm (NASDAQ: QCOM) fit that profile. Each has a real competitive edge in semiconductors, and each should be able to support and grow its dividend for years to come.

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Texas Instruments

Texas Instruments has been around since 1930 and has built a massive scale in analog chips and embedded processors. Those components handle power management and signal conversion in everything from factories and cars to consumer electronics and data centers. High margins and strong free cash flow have helped TI raise its dividend for 22 consecutive years.

Analog chips account for most of TI's revenue, and the market for these chips is less competitive than markets like GPUs. Many of TI's parts remain in production for years, strengthening customer relationships and reducing the need for constant innovation.

That advantage shows up in profitability. In the second quarter, revenue rose 23% year over year to $5.5 billion, driven by improving demand in industrial, data center, and automotive markets. Net income was nearly $2 billion, highlighting the high margins that support growing dividend payments.

The company has raised the dividend at a compound annual rate of 8% over the last five years. At the current quarterly payout of $1.42, the stock offers a forward yield of roughly 2.2%. If the recovery in its end markets continues, that yield looks especially attractive going into September.

TI's moat is also built on a wide product portfolio, long product lifecycles, and in-house manufacturing. Together, those strengths are hard for competitors to replicate.

The biggest risk is the usual cyclicality in semiconductors, especially when the economy slows. Over the past five years, softness in autos and consumer markets has limited growth, with revenue rising about 4% annually.

Even so, TI's scale has allowed it to keep investing while still returning cash to shareholders. Over the last year, the company generated $5.5 billion in free cash flow on $19.5 billion in revenue, and it continues to follow its policy of returning virtually all free cash flow to investors through dividends.

Qualcomm

Qualcomm is a leading supplier of wireless chips and connectivity solutions. Its Snapdragon processors power many Android smartphones, and the company's high profitability supports a dividend yield of about 2.2%.

What makes Qualcomm interesting today is that it's working to reduce its reliance on handsets by expanding into data centers, automotive, and other AI-driven markets. That shift, combined with the stock's recent pullback, creates a potentially compelling entry point.

Handsets still generate most of the company's revenue. The segment posted a 20% year-over-year decline in revenue last quarter, reflecting a weak smartphone market and lost business from Apple's upcoming iPhone. Much of that concern appears priced in, with shares down 36% from a recent high.

The longer-term story is diversification. Qualcomm is using its expertise in power-efficient computing to serve industrial devices, robotics, and data centers, where it could see accelerating growth. Management expects non-handset revenue to represent more than half of its chip business by fiscal 2029.

Specifically, management expects non-handset revenue to reach $40 billion by 2029, including $15 billion from data centers. The company is also gaining traction in the automotive sector, recently signing a deal with BMW to supply chips for next-generation driver-assistance and digital cockpit systems.

Qualcomm's ability to pivot is backed by scale and cash generation. Even with soft handset revenues, it still produced $10.4 billion in free cash flow over the last year on $44 billion of revenue. That's a healthy free cash flow margin of about 24%.

What's more, the company paid out only 36% of free cash flow as dividends over the last four quarters. The dividend has grown at a 6.5% annualized rate over the past five years, with the current quarterly payment at $0.92 per share. Its relatively low payout leaves room for future dividend increases while Qualcomm funds its expansion into new markets.

With a 2.2% forward yield and shares still off their highs, Qualcomm looks like an appealing buy on the dip.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Qualcomm, and Texas Instruments. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy.