Another artificial intelligence (AI) stock just raised its dividend, this time by 17%

It’s the season. The weather is cooling down, kids are going back to school, and many tech companies are raising their dividends for the coming year.

While artificial intelligence (AI) technology stocks aren’t necessarily known for high dividend payouts, they i am known for growth. So if you can find a winning AI name that also pays a dividend, a small payout today could look much, much bigger in five, 10 or 20 or more years.

Two weeks ago, a semiconductor company raised its dividend by 15%. But not to be outdone, one of his colleagues topped it last Tuesday — by increasing quarterly payouts by 17%.

And yet, there are reasons why I’m more optimistic about the first company, if I had to choose between them.

KLA Corporation is offering an early Christmas

KLA Corporation (KLAC -3.47%)which makes semiconductor (semicap) capital equipment, said Tuesday it would raise its quarterly payout to shareholders by 17 percent, from $1.45 a share to $1.70, good for an annual dividend of $6.80. That’s an impressive increase, especially since it marks KLA’s 15th consecutive year of annual dividend increases.

The new increased dividend is only about 0.9% at the current share price. But that shouldn’t necessarily stop dividend investors from looking at KLA. If a company has the ability to beat inflation with dividend increases for years, it can be a great long-term holding and end up paying you big in retirement.

The huge increase in KLA payouts is a sign of optimism about AI growth that should be celebrated. But two of its peers just raised their dividends and appear to have a greater ability to raise them even more in the years ahead.

Certain semiconductor stocks yield big dividends. Image source: Getty Images.

How is KLA different from Lam and applied materials

KLA Corporation is a leader in process control and metrology equipment that is used to inspect chips and wafers for defects at many points along the semiconductor manufacturing process. These machines are in high demand as chip designs keep getting smaller and more complex, especially in the age of AI. Like many big names in semiconductor equipment, KLA dominates that niche, with over 50% market share for certain processes.

KLA’s dominant position, as well as the stability of process control and diagnostics relative to other equipment segments, gives its stock a more favorable valuation on a higher multiple. The companies that dominate the etching and deposition market, Lam Research (LRCX -2.92%) and Applied materials (AMAT -3.05%)tend to trade at lower multiples, even though all three companies have similar long-term growth prospects, profitability and cyclicality. Lam just increased its dividend by 15% two weeks ago. Applied Materials looks poised for big growth when it raises its dividend (as it usually does) in March; six months ago, Applied increased its dividend by 23%.

Which midcap dividends look poised for the biggest growth?

KLA has certainly proven to be a great dividend producer and should continue to be. But despite today’s big increase, it may be a bit tighter on how much it can raise its payout compared to Lam Research or Applied Materials.

This is due to a variety of factors, including overall valuation, current payout ratio (the portion of earnings paid out as dividends) and balance sheet leverage:

Data source: Yahoo! Finance. Forward payout ratio = forward dividend divided by current year earnings estimates.

Now, these all look like great companies for dividend growth investors to own, with high margins and relatively low payout ratios.

But KLA trades at a higher valuation despite having more than $2 billion in net debt, while both Lam Research and Applied Materials have sizable net cash positions (more cash than debt). It also has a high price-to-earnings (P/E) ratio of 36, much higher than its two peers, and a higher current payout ratio than Lam. So the forward estimates above already assume a big increase in KLA’s earnings.

Clearly, KLA’s dominance of its niche, evidenced by its higher operating margin, is tempting for investors. But by the same token, KLA gets credit for it with a higher rating.

Meanwhile, its earnings power turned out to be similar, in terms of growth and cyclicality, to that of the other two companies:

KLAC EPS Diluted (TTM) data by YCharts.

Finally, while KLA has a dominant position now, it is starting to see strong competition in the metrology market from both Applied Materials and new entrants. On innovation. So while it has higher margins and seems safer right now, there probably isn’t that much room for market share or margins to grow. Investors simply assume that both will continue to rise.

KLA is still a great stock, it’s just not preferable to the other two

KLA’s big dividend hike is another indicator of a bright long-term future for semicap stocks, especially in the AI ​​era. It would no doubt be a great stock to own over the long term and should continue to grow its payout above the rate of inflation.

However, given their lower valuations, better balance sheets and similar growth prospects, Lam or Applied would be my current picks for future dividend growth.