Smart Dividend Portfolio Edition: Embedded Income
1
Dear Investor,
Welcome to this edition of TipRanks’ Smart Dividend Portfolio & Newsletter.
1
1
Market-Moving News: Feb 16, 2026
U.S. stocks ended the week lower as investors moved away from big tech and focused more on safer areas of the market. The S&P 500 (SPX) fell 1.28%, the Nasdaq 100 (NDX) dropped 1.27%, and the Dow (DJIA) slid 1.15%. At the same time, the 10-year Treasury yield eased to about 4.09%, while gold (CM:XAUUSD) jumped above $5,000 and oil (CM:CL) held near $63 a barrel.
One of the biggest stories of the week came from Amazon (AMZN), as the stock posted its ninth straight day of losses, the longest losing streak since 2006. The drop followed weak guidance and investor concern over the company’s plan to spend $200 billion in 2026 on AI-related capex. Amazon is betting that the heavy investment this year will pay off down the road.
Meanwhile, Microsoft (MSFT) attracted attention after its AI chief, Mustafa Suleyman, said the company wants “true AI self-sufficiency.” He added that Microsoft aims to build its own foundation models at the highest level, signaling a push for more control over its AI future. Suleyman’s words also caused a stir after claiming that “most, if not all professional tasks” could be automated within 12 to 18 months, with health care seen as an early area of impact.
Turning to other movers, Rivian Automotive (RIVN) surged 26.64% after strong quarterly results and plans to begin deliveries of its new R2 SUV later this year. Coinbase Global (COIN) climbed 16.57% as stablecoin revenue hit a record, even with mixed earnings results.
In semiconductors, Applied Materials (AMAT) gained 8.05% after a strong quarter that pushed analysts to raise price targets. In consumer and travel names, Roku (ROKU) jumped 8.63%, while Airbnb (ABNB) rose 4.66% on upbeat guidance.
On the downside, Pinterest (PINS) fell 16.84% after a weak sales outlook, and DraftKings (DKNG) dropped 13.51% on downbeat forecasts for 2026.
Separately, Novo Nordisk (NVO) filed suit against Hims & Hers Health (HIMS) over compounded GLP-1 drug marketing, adding more focus on regulation in the weight loss space.
1
1
1
This Week’s Quality Dividend Stock Idea
Microchip Technology (MCHP) is a U.S.-based semiconductor company that designs and manufactures embedded control and mixed-signal solutions. Its products are used in automotive, industrial, data center, communications, consumer, and aerospace and defense applications. The company serves a broad global customer base and focuses on mission-critical systems that require high reliability, energy efficiency, and long-term supply continuity.
1
Silicon Foundations
Microchip Technology was founded in 1989 as a spinoff from General Instrument’s microelectronics division, initially focused on developing microcontroller products for embedded control applications. In the early 1990s, the company went public and built its reputation around its proprietary Peripheral Interface Controller (PIC) microcontroller architecture, emphasizing ease of use, integrated development tools, and long product life cycles. This approach fostered deep relationships with engineers and OEMs, creating a durable base of recurring design wins and steady revenue growth.
During the 2000s, Microchip broadened its portfolio beyond 8-bit microcontrollers to include analog, memory, and mixed-signal solutions, thereby expanding its addressable market and increasing content per customer. The company paired organic innovation with disciplined acquisitions, a strategy that accelerated meaningfully in the mid-2010s.
In 2016, Microchip acquired Atmel, significantly expanding its microcontroller and connectivity offerings and strengthening its competitive position in embedded systems. Two years later, it completed the transformative acquisition of Microsemi, and this transaction materially increased the company’s scale and added high-performance analog, mixed-signal, timing, Field-Programmable Gate Arrays (FPGA),1 and aerospace and defense capabilities, broadening its exposure to industrial, communications, and data center markets. Together, these acquisitions reshaped Microchip into a more diversified and higher-margin semiconductor supplier.
Subsequent deals were more targeted but strategically aligned. The 2020 acquisition of Tekron International enhanced the company’s timing and synchronization portfolio for critical infrastructure applications. In 2024, Microchip acquired VSI and Neuronix AI Labs, marking its entry into AI-enabled edge hardware and reinforcing its push into intelligent embedded and edge computing solutions.
Divestitures have been limited and primarily operational in nature. In late 2024, Microchip closed its Tempe, Arizona Fab 2 wafer facility, consolidating production into its Oregon and Colorado fabs to optimize capacity and improve manufacturing efficiency. The company agreed to sell the Fab 2 wafer facility to a third party in October 2025, with the transaction expected to close following customary conditions.
In the 2020s, alongside portfolio expansion, Microchip prioritized deleveraging, long-term supply agreements, and disciplined capital allocation. Combined with sustained investment in research and development, these efforts have positioned the company as a scaled, diversified leader in microcontrollers, analog, connectivity, and edge-focused embedded solutions, supporting resilient cash flow and long-term earnings growth.
—
1- FPGA are customizable, reprogrammable logic chips used for high-performance processing, bridging, and acceleration in embedded systems and memory products.
1
Embedded Edge
Microchip Technology operates a diversified semiconductor business focused on embedded control and connectivity solutions. The company generates revenue primarily from microcontrollers, analog devices, connectivity products, memory, and other specialized semiconductors that are designed directly into customers’ end products. These chips are embedded across automotive, industrial, aerospace and defense, data center, communications, and consumer applications. Because these components are designed into systems at the engineering stage, they typically remain in place for many years, creating long product lifecycles and recurring demand tied to customer production volumes.
A defining feature of Microchip’s model is portfolio breadth. The company offers general and specialized 8-bit, 16-bit, and 32-bit mixed-signal microcontrollers, microprocessors, analog, memory products, and FPGA. This enables Microchip to provide complete system-level solutions rather than single components, increasing semiconductor content per design. Engineers often standardize on Microchip’s architecture and development tools, raising switching costs and supporting repeat business across multiple product generations.
The company’s end-market exposure is broad, with no single segment dominating results. This diversification reduces reliance on any one industry while providing exposure to structural growth themes such as vehicle electrification, industrial automation, connectivity expansion, and edge computing.
Microchip’s networking and connectivity portfolio is aligned with two major modernization cycles: the transformation of automotive electronics and the digitization of industrial systems, as factories move from standalone equipment to connected, software-driven, data-enabled environments.
In automotive markets, vehicles are becoming increasingly software-driven and data-intensive. Features such as advanced driver assistance systems (ADAS), over-the-air software updates, infotainment platforms, and expanding sensor arrays are generating significantly more in-vehicle data than legacy communication standards. This shift is accelerating the move to Ethernet-based vehicle architectures, which offer higher bandwidth, simpler wiring, and scalable zonal designs—an area supported by Microchip Technology through Ethernet connectivity, Peripheral Component Interconnect Express (PCIe) solutions, and ASA Motion Link. Given lengthy automotive qualification cycles, production ramps typically follow multi-year development periods, supporting durable revenue streams and rising semiconductor content per vehicle.
A similar transition is underway in industrial markets. Older communication standards such as RS-232 and RS-485 are increasingly being replaced by Ethernet-based solutions, including single-pair Ethernet and real-time industrial protocols such as EtherCAT. These technologies enable robotics, predictive maintenance, and advanced factory automation. The company provides integrated silicon and firmware solutions that simplify system design compared to multi-vendor approaches. Industrial design cycles generally span 18 to 24 months, which are subsequently followed by long product lifecycles once systems move into production.
Beyond automotive and industrial connectivity, Microchip is expanding in high-performance data center applications. Its PCIe Gen 6 switch platform addresses growing bandwidth demands in AI and cloud infrastructure. PCIe (Peripheral Component Interconnect Express) is a high-speed interface standard used to connect processors, accelerators, and storage devices. As AI workloads increase, the need for faster data transfer between components continues to rise. Three recent PCIe design wins include one ramping in the second half of 2026, a larger opportunity potentially exceeding $100 million in calendar 2027, and another contract expected to begin production in late 2027 or early 2028. Aerospace and defense demand remains strong, supported by rising global defense budgets and commercial aircraft production increases, while the memory business has gained share as competitors shifted capacity toward NAND and flash.
1
Calibrated Comeback
Microchip faced its most recent downturn during FY24 and FY25, primarily driven by an industry-wide inventory correction following the post-pandemic semiconductor boom. During the pandemic recovery, customers had built excess semiconductor inventory to guard against supply shortages. As demand normalized, many customers, particularly distributors, reduced those elevated inventory levels by purchasing less from the company than they were selling to end users. This gap between “sell-in” (what Microchip ships to distributors) and “sell-through” (what distributors sell to customers) led to revenue declines, margin compression, and temporarily higher leverage. The trough occurred in fiscal 2024.
However, in the first nine months of FY26, the company’s business improved. Stabilization began in the December quarter of FY26 as inventory levels moved closer to normal and bookings improved. The imbalance between sell-in and sell-through narrowed to roughly $12 million, a significant improvement from prior quarters, indicating that distributor orders were aligning more closely with underlying end demand. Bookings exceeded shipments, resulting in a book-to-bill ratio above 1, meaning new orders outpaced deliveries during the quarter. Backlog increased, and March quarter guidance implies sequential growth of roughly 6%, suggesting demand was improving beyond normal seasonal trends.
Operationally, Microchip employs a hybrid manufacturing model designed to balance cost control with access to advanced technologies. Approximately 37% to 40% of wafers are produced internally on mature process nodes of 110 nanometers and above, primarily serving industrial and automotive markets. Roughly 60% of production is outsourced to external foundries for more advanced nodes of 90 nanometers and below, including most data center products. Currently, lead times for most products are stable at four to eight weeks, indicating balanced supply and demand across much of the portfolio. However, chips built on advanced process technologies such as 3 nanometers are experiencing longer lead times, and certain materials like semiconductor substrates are beginning to show tighter availability, particularly in externally manufactured products.
During the downturn, internal factories operated below optimal utilization levels, creating underutilization charges that reduced gross margins. As volumes recover, factory loading is gradually improving, which should help reduce these costs over time. Gross margins have recovered meaningfully from trough levels, supported by an improved product mix, normalization of reserves, better factory utilization, and reduced write-offs. Management maintains a long-term gross margin target of 65%, though achieving that level depends on sustained volume growth and favorable mix.
China accounts for roughly 18% of revenue, though about half of that relates to products manufactured in China and exported globally. Revenues from customers in China represent only a high single-digit percentage of total sales. While domestic semiconductor capabilities have improved, much of Microchip’s portfolio consists of complex, highly integrated components that are difficult to replicate quickly, particularly in automotive-grade connectivity and advanced analog applications. To address geopolitical concerns, the company supports dual-sourcing strategies that include both Asian foundries and U.S.-based manufacturing facilities, such as its Gresham site, thereby enhancing supply resilience despite the added operational complexity. Management estimates that less than 5% of overall revenue faces long-term structural risk from localization efforts.
Financially, the company has adopted a more conservative posture following the downturn. Management is prioritizing debt reduction, targeting leverage below 2x over time and ultimately closer to 1.5x. During the downturn, Microchip issued $1.5 billion in mandatory convertible securities to preserve its investment-grade credit rating and reinforce balance sheet stability, helping safeguard dividend sustainability through the cycle. Earlier this month, the company raised capital by issuing $800 million in convertible bonds that mature in 2030, increasing the deal size from the originally planned $600 million. These bonds were sold privately to large institutional investors and can later be converted into Microchip shares under certain conditions. After fees and expenses, the company expects to receive about $785 million in cash. Investors who bought the bonds also have a short window to purchase an additional $100 million of notes. For shareholders, this transaction strengthens Microchip’s liquidity and financial flexibility.
Overall, Microchip is emerging from an inventory-driven correction with improving bookings, stabilizing end markets, recovering margins, and renewed balance sheet discipline. Its diversified portfolio, long product lifecycles, and expanding connectivity exposure position the company for durable cash generation across multiple semiconductor cycles.
1
Chip Reset
Microchip has endured a challenging three-year downturn, with revenue declining at roughly 12.4% and earnings contracting by about 35% annually, as a prolonged semiconductor inventory correction and weakness in industrial and automotive markets weighed on results. Lower volumes, elevated inventory, and higher relative operating costs compressed margins and earnings. In response, the company undertook significant restructuring, reduced its manufacturing footprint, and focused on normalizing inventories while repositioning the portfolio toward long-term growth areas such as automotive connectivity and AI-enabled industrial systems.
Early signs of recovery emerged in its fiscal third-quarter results, when the company reported nearly $1.2 billion in net sales, up 15.6% year-over-year and above the high end of management’s guidance. Growth was driven by networking, data center, FPGA, and licensing businesses, while microcontroller and analog revenue held flat sequentially, outperforming the typical 3%–5% seasonal decline. Regionally, sales increased in the Americas and Europe and were flat in Asia. Adjusted gross margin expanded to 60.5%, up 379 basis points sequentially, despite $51.7 million in capacity underutilization charges and $58.4 million in new inventory reserves. Operating margin rose to 28.5%, up 800 basis points year over year, while adjusted net income reached $252.8 million, or $0.44 per share, exceeding guidance by $0.04.
Balance-sheet trends continued to improve. Inventory declined by $37.6 million sequentially to $1.06 billion, or 201 days, including 17 days of high-margin, end-of-life products. Distributor inventory remained within a normal 28-day range and sell-through exceeded sell-in by $11.7 million, indicating the inventory correction is nearing completion. Cash and investments totaled $250.7 million, net debt declined by $26 million, and net debt to adjusted EBITDA improved to 4.18x from 4.69x in the prior quarter. While the company has returned capital through dividends and repurchases and reduced debt by $7.4 billion, cutting debt in 25 of the last 30 quarters, management continues to prioritize further deleveraging given the still-elevated leverage. The company has a long-term credit rating of “BBB” from Fitch, indicating a stable outlook.
Cash generation strengthened meaningfully. Adjusted EBITDA reached $402 million, or 33.9% of sales, with trailing 12-month EBITDA of $1.23 billion. Operating cash flow totaled $341.4 million, while adjusted free cash flow rose nearly 25% year over year to $305.6 million. Since fiscal 2019, Microchip has generated approximately $13.6 billion in adjusted free cash flow. Capital expenditures remained disciplined at $22.5 million for the quarter, with full-year spending expected to be $100 million or less.
Looking ahead, management guided for fiscal fourth-quarter net sales of $1.26 billion ± $20 million, implying roughly 6.2% sequential growth and nearly 30% year-over-year expansion at the midpoint. Adjusted gross margin is expected to range between 60.5% and 61.5%, operating expenses between 31.3% and 31.7% of sales, and operating margin between 28.8% and 30.2%, with adjusted EPS guided to $0.50 at the midpoint. As inventory reserves normalize and capacity underutilization charges, currently around $50 million, decline gradually, Microchip appears to be transitioning from balance-sheet repair toward a more durable earnings recovery.
1
Steady Income
Microchip initiated quarterly cash dividend payments in 2003 and has raised its dividend consistently for 22 consecutive years, underscoring a long-standing commitment to shareholder returns. Over the past decade, the dividend has grown at an annualized rate of about 10%, reflecting steady cash flow generation. For the most recent quarter, the company declared a cash dividend of $0.455 per share, payable on March 10, 2026, to shareholders of record as of February 23, 2026. Based on adjusted earnings, the payout currently exceeds 100%, highlighting the importance of cash flow strength and balance-sheet management in sustaining distributions. The company has a dividend yield of 2.79%, exceeding the technology sector average of 1.069%.
In addition to dividends, Microchip’s board authorized a $4 billion share repurchase program in November 2021, allowing buybacks through open-market or privately negotiated transactions with no expiration date. Despite this flexibility, the company did not repurchase shares during the fiscal third quarter or the first nine months of FY2026, signaling a deliberate capital allocation choice amid elevated leverage and a focus on debt reduction. As of December 31, 2025, approximately $1.56 billion remained available under the authorization, preserving optionality to resume repurchases in the future as financial conditions and strategic priorities evolve.
MCHP shares have risen roughly 36% over the past year, reflecting improving semiconductor conditions, easing inventory pressures, and stronger fiscal Q3 FY2026 results that signaled the end of the downturn. As revenue trends stabilized and restructuring actions began to translate into better margins and cash flow, investor sentiment improved, supported by the company’s exposure to longer-term growth themes such as automotive connectivity, AI, and IoT.
This recovery has pushed Microchip’s valuation above its historical averages. The stock now trades at a premium on trailing and forward non-GAAP P/E, forward EV/EBITDA, and price-to-cash-flow metrics, and sits at the higher end of the valuation range versus peers such as STMicroelectronics, NXP Semiconductors, and Texas Instruments. While the forward PEG ratio remains in a moderate range, the recent multiple expansion reflects the market’s growing confidence in the sustainability of Microchip’s recovery and its improving long-term earnings outlook.
For dividend and income investors, the current setup highlights Microchip’s improving fundamentals rather than a limitation. The company’s strengthening cash generation and disciplined capital allocation reinforce the durability of its dividend, while the premium valuation reflects growing confidence in earnings recovery and long-term cash flow visibility.
Analysts remain bullish about MCHP, supported by resilient and expanding free cash flow that funds debt reduction, dividends, and targeted R&D and capital spending without relying on equity issuance. This cash flow strength enhances financial flexibility as earnings recover and supports ongoing deleveraging. At the same time, solid design wins and deepening automotive and data-center partnerships are improving revenue visibility and increasing semiconductor content per system, laying the foundation for multi-year growth.
Profitability trends also underpin the constructive outlook. High non-GAAP gross margins, driven by product mix and structurally higher-margin offerings, combined with management’s margin recovery guidance, point to improving operating leverage as utilization normalizes and higher-margin products scale. Reflecting these dynamics, Street consensus price targets imply approximately 12% upside from current levels, while more bullish scenarios suggest potential gains of up to 46%.
1
Investing Takeaway
Microchip Technology stands out as a compelling income-oriented holding for investors seeking reliable and durable dividends rather than short-term yield chasing. The company’s long record of consistent dividend growth reflects a business model built around embedded, mission-critical semiconductors with long product lifecycles and recurring demand. Even through a difficult industry downturn, Microchip preserved dividend continuity by prioritizing cash flow discipline, balance-sheet stability, and conservative capital allocation.
As the semiconductor cycle turns, improving margins, normalizing inventories, and rising cash generation further strengthen dividend durability. Management’s focus on deleveraging enhances financial flexibility, reducing long-term risk while supporting ongoing shareholder returns. For dividend and income investors, Microchip offers a combination of dependable income, improving coverage from cash flow, and exposure to structural growth areas that support long-term dividend sustainability rather than short-lived yield appeal.
1
Dividend Investor Portfolio
1
Portfolio News
▣ Cisco Systems (CSCO) reported a strong second quarter of FY26, with revenue of $15.3 billion, up about 10% year-over-year, surpassing guidance and consensus expectations. Adjusted earnings beat forecasts, with adjusted EPS of $1.04, driven by broad demand across networking and security solutions. Growth was underpinned by accelerating product orders globally and $2.1 billion in AI infrastructure orders from hyperscalers, showcasing strength in data-center and AI-related investments. Profitability remained robust despite cost pressures, and Cisco raised its quarterly dividend by 2.4% to $0.42 per share, signaling confidence in cash flow. Cisco’s outlook reinforced confidence in its near-term momentum and full-year trajectory.
For the third quarter, the company guided revenue to a range of $15.5 billion at midpoint, reflecting steady demand across its core networking and security portfolios. Adjusted earnings for the quarter are expected to come in at $1.03 per share, broadly in line with market expectations, signaling stable margins despite ongoing cost and investment considerations.
Looking further ahead, Cisco Systems raised its full-year fiscal 2026 outlook. Management now expects revenue of $61.5 billion at midpoint, ahead of consensus estimates of roughly $60.77 billion, alongside adjusted earnings of $4.15 per share at midpoint, compared with expectations centered near $4.13.
▣ Kroger (KR) made headlines this week with the appointment of retail veteran Greg Foran as its new CEO, succeeding interim leader Ron Sargent after an extended search. Foran, a former head of Walmart’s U.S. operations, brings deep experience in store execution and digital strategy. Alongside the leadership change, Kroger reaffirmed its full-year guidance, including identical-store sales ex-fuel growth of roughly 2.7%–3.4% and full-year adjusted EPS of $4.75 at the midpoint.
Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
1
1
Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.98% | +5.48% | $6,133.47 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Mar 13, 2026 | Apr 01, 2026 | 2.46% | $6.80 |
| Amgen (AMGN) | May 19, 2026 | Jun 09, 2026 | 3.27% | $9.52 |
| BlackRock (BLK) | Mar 09, 2026 | Mar 24, 2026 | 2.61% | $22.92 |
| Bank of Nova Scotia (BNS) | Apr 01, 2026 | Apr 28, 2026 | 5.98% | $3.21 |
| EOG Resources (EOG) | Apr 16, 2026 | Apr 30, 2026 | 3.06% | $4.08 |
| ExxonMobil (XOM) | May 15, 2026 | Jun 10, 2026 | 3.64% | $4.12 |
| Honeywell International (HON) | Mar 03, 2026 | Mar 17, 2026 | 2.39% | $4.76 |
| IBM (IBM) | May 12, 2026 | Jun 10, 2026 | 3.14% | $6.72 |
| JPMorgan Chase (JPM) | Apr 07, 2026 | Apr 30, 2026 | 3.43% | $6.00 |
| Kroger (KR) | May 15, 2026 | Jun 01, 2026 | 3.08% | $1.40 |
| Cisco Systems (CSCO) | Apr 07, 2026 | Apr 28, 2026 | 2.22% | $1.68 |
| PepsiCo (PEP) | Mar 10, 2026 | Mar 31, 2026 | 3.8% | $5.92 |
| Philip Morris (PM) | Mar 24, 2026 | Apr 14, 2026 | 6.06% | $5.88 |
| Qualcomm (QCOM) | Mar 05, 2026 | Mar 26, 2026 | 2.36% | $3.56 |
| VICI Properties (VICI) | Mar 27, 2026 | Apr 07, 2026 | 5.22% | $1.8 |
| Verizon (VZ) | Apr 13, 2026 | May 05, 2026 | 6.09% | $2.76 |
NameEX-Dividend DatePayment DateYield on Cost Annual DPS
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
