Broadcom: a profits-laden lesson in why fundamentals matter

It's impossible to predict the future.

Sorry, but it’s true.

We can track a company’s results, examine its peers, and analyze relevant trends. But ultimately, whatever forward-looking estimates we come up with are just that…

Estimates.

It’s impossible to totally remove speculation from equity investing. Not a single trader has access to perfect insight or foresight. We’re all ultimately guessing.

That’s why I try my best to always remember Proverbs 27:1. It says, “Do not boast about tomorrow, for you do not know what a day may bring.”

It helps me stay thankful for my personal blessings instead of taking them for granted. And it keeps me humble professionally, forcing me to acknowledge three possible outcomes whenever I come to an investing conclusion:

Even so, I wholeheartedly believe that investing is the best path toward financial freedom and a dignified retirement. And I still rely on fundamental research to remove as much speculation as possible from my portfolio management process.

Of course, it helps how I’ve discovered a secret that gives me peace of mind in the markets. Or as Brad would say, it helps me sleep well at night, or SWAN.

It’s built on a fact that will be just as valid today as tomorrow… next week… next year… and as far into the future as you can possibly imagine.

I’m talking about seeking solace in the science of dividends. It’s amazing what that focus can do.

Unlike stock prices, dividends are based on hard and fast numbers, not speculation. They’re built on a foundation of earnings and cash flow, so it’s easy to tell if they’re sustainable or not.

Companies either have the money to justify their shareholder payments or they don’t. It’s as simple as that.

When a business consistently generates excess cash, it can pay reliable dividends. And when it consistently grows its free cash flow, it can pay reliably growing dividends.

Bouts of high stock market volatility don’t affect those figures. So I don’t have to worry about my passive income stream when my dividend-paying stocks take unfair hits.

I can easily just check to see whether or not my payouts are safe by looking at their companies’ balance sheets.

Yes, you have your black swan events like the Covid-19 shutdowns that completely shuttered businesses without warning, locking their customers out and eliminating their ability to make money. That can still happen.

But even in that (hopefully) once-in-a-lifetime situation, it was about the numbers. Reduced cash = reduced dividends. No cash = no dividends.

It’s as simple as that.

I like global chipmaker Broadcom (AVGO) quite a bit. It’s my largest holding, accounting for more than 10% of my overall portfolio at the beginning of last month.

And as of June 2, it was doing great for the year, up more than 40% to trade at roughly $485 per share. So you’d better believe I was happy with its performance.

Better yet, when Broadcom reported its second-quarter earnings on June 3, they were excellent. The company grew its sales by 47.9% year over year… posted record earnings of $2.44 per share, which represented 54% growth… and gave revenue growth guidance of 84%.

What’s not to love?

As it turns out, the current answer appears to be “a lot.” Because the stock has been in free fall ever since those exceptional results came out.

The rest of Broadcom’s chart for June was nothing short of brutal, showing a 24% decline from its all-time highs. And considering how July has begun, I have no idea how much further they might fall.

Yet I haven’t sold a single share. And here’s why…

I’ve owned Broadcom for years now. Almost a decade, actually, since I began buying it back in 2017. At the time, the stock was trading for about $21 on a split-adjusted basis (it made a 10:1 split in 2024) with an annual dividend of about $0.40 per share.

So I purchased it. And since Broadcom has grown both its earnings per share (EPS) and dividend per share every single year since that first purchase, I’ve bought into it further – repeatedly – from there.

Today, my cost basis is $23.43, representing about a 1,500% gain – even after the stock’s recent slump.

That’s why I’m not panicking. There’s no reason to thanks to its dividend and the numbers backing it.

For the record, I’ve had numerous occasions to rethink my Broadcom position. This bout of volatility isn’t my first rodeo with the stock.

Despite the company’s perfect fundamental growth record, AVGO’s journey from $21 per share to $365 has been bumpy. Including its current drop, Broadcom has experienced six double-digit selloffs since 2018.

But you know what? It’s always recovered eventually, going on to hit new high after new high after new high.

And I’m rewarded along the way thanks to the reliable, predictable returns it keeps generating. Because of its tremendous, sustainable dividend growth during the past nine years, my yield on cost today is north of 11%.

Let me repeat that…

Broadcom is paying me back 11% of my cost basis every single year in dividends – something that wouldn’t be happening if I’d chosen to focus on market suspicions instead of stock-specific fundamentals.

In which case, here’s another fact I can fall back on: Broadcom raised its dividend by 10.2% last year. So, thanks to its fantastic growth prospects, it’s extremely likely management will approve yet another double-digit dividend increase in Q4.

Moreover, if the company keeps compounding that payout the way it has been, it will roughly double in seven years. And if I stick with it through fundamentals-based thick and emotion-based thin, my yield-on-cost will rise to 22.2%.

For the record, those calculations are on the conservative side. Given Broadcom’s consensus EPS growth estimates of 70% this year… 66% next year… and 35% in 2028…

It could raise its dividend by more than 10% later this year.

Heck, I think it’s possible for this chipmaker to double its dividend by 2030. And I truly believe that, before my AVGO shareholding story is over, my yield on cost could reach into the triple digits.

How amazing would that be: to receive your entire original investment back in the form of dividends, year in and year out?

In honor of the 250th anniversary of The United States of America’s Declaration of Independence, let’s talk about the real estate investment trusts (REITs) that came out of it.

That’s not a cheap gimmick to get you to watch the latest episode of The Wide Moat Show.

The economic opportunities our Founding Fathers opened when they committed to the self-evident truths “that all men are created equal… endowed by their Creator with certain unalienable Rights” including “Life, Liberty, and the Pursuit of Happiness”…?

They’re widespread and enormous.

So we’re more than happy to point even just a few of them out right here.