The beauty of long-term investing is how much one can potentially get paid from an investment decades into the future. So, for those in their early to mid-adulthood, it's not too early to think about income streams for retirement 20, 30, or 40 years from now when choosing stocks today.

One of the best ways to accomplish a healthy retirement is by investing in dividend growth stocks. These stocks may not impress in terms of their current dividend yield, but if a stock can grow its payout above the rate of inflation for many years, the power of compounding can make for a comfortable retirement indeed.

Semiconductor equipment player Applied Materials (NASDAQ: AMAT) has just a 0.7% yield today. But for those with a long time horizon, there are lots of reasons to think those payouts will be massively larger five, 10, and 20 years or longer from now.

AI-powered growth and efficiency

Obviously, for a dividend to grow, a company's earnings per share has to grow, and the easiest way for earnings and cash flow to grow is for the business to grow efficiently. On that front, things look rosy for Applied Materials due to multiple technology inflections, including artificial intelligence (AI) and the energy tradition.

Applied Materials is the largest semiconductor equipment provider in terms of revenue and is among the most diverse. It has a strong position in etch and deposition, where it's one of two to three players for crucial manufacturing steps. It also has businesses in metrology and ion implant machines, among others.

Applied Materials' leadership in multiple domains, touching leading-edge, lagging-edge, and memory chips, has afforded it the broad knowledge to anticipate market trends and capitalize. While the semiconductor industry is cyclical, it's a long-term growth industry, and Applied Materials has grown its earnings at a 26% average growth rate over the past five years.

While the takeoff of cloud and AI makes that hard to continue at the company's larger size, analysts still expect the company to compound earnings at a 15.6% average growth rate over the next five years. That's well above market growth.

Even better is that this growth is efficient, without the need for excessive capital expenditures that many other chip companies need to make. Applied Materials makes impressive operating margins, near 30%, and has earned a stunning return on equity of 43% over the past 12 months.

Applied Materials' competitive advantage is its unmatched technological expertise in the delicate art of chip manufacturing, and those research and development chops are on full display in the AI era. The semiconductor industry is just beginning to produce gate-all-around transistors and backside power delivery. The company believes it has invested ahead of these technology transitions and stands to gain market share even as these AI-powered markets expand in the years ahead.

That's a recipe for strong earnings growth.

A low payout ratio and lots of buybacks

Beyond earnings growth, another reason Applied Materials can grow its dividend in the years ahead is that it has a very low payout ratio of just 15.3%. That means it only pays out about 15% of its net earnings today as dividends.

Even better, the company is also returning even more cash to shareholders in the form of share repurchases. Last quarter, the company's share repurchases of $861 million topped dividend payments of $331 million by 2.6 to 1.

So, not only does Applied Materials have ample room to increase the payout ratio, but its share repurchases are also helping to lower its share count. Over the past year, its repurchases have lowered its share count by about 1.2%. That means it could, theoretically, increase its dividend per share by 1.2% without raising the total number of dollars paid out.

Over time, growing earnings combined with a declining share count and a low current payout ratio will pave the way for lots of dividend-per-share growth ahead.

A dividend tied to this resilient segment

Finally, a third reason to feel good about Applied Materials' dividend growth is that management pegs the payout to profits earned from its services business, which made up 23.3% of the company's revenue last quarter, with operating margins of 29.6%.

On the recent conference call with analysts, CFO Brice Hill noted, "We think about our dividend as being enabled by the profits from the services business, and that gives us confidence we'll be able to raise our dividend looking forward."

Applied Materials' main business is selling high-tech equipment, but one of the knocks against the semiconductor business is its cyclical nature. However, the company also attaches services agreements to its machines, which tend to have a much steadier growth path. Hill noted that about 85% of Applied Materials' services revenue is "recurring" in nature.

This is because, even as the company's machine sales ebb and flow, the services agreements are usually tied to the size of its installed equipment base. And that existing base tends to grow every year, even if machine sales slow or even decline in any one year.

Last quarter, Applied Materials saw 5.3% equipment sales growth but 8% services growth -- the 20th consecutive quarter of growth for that segment. Management noted that the installed base grew 7% year over year, but services revenue per chamber grew even more than that.

Over the long term, Applied Materials expects double-digit growth in the segment. There are reasons to be optimistic about that; software is now making up a large part of the services agreements, as the company is using AI from its vast installed base of machines to help customers limit defects and increase yields. Management noted on the conference call with analysts that its subscription terms last an average of 2.8 years and have a renewal rate above 90%.

That lends a lot of stability to the dividend, as well as the ability to grow it every year. If Applied Materials is targeting low-double-digit growth for the services segment over the long term, that's what investors should anticipate for dividend growth, too.

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Billy Duberstein and/or his clients have positions in Applied Materials. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.

Why Applied Materials Is Destined to Be a Magnificent Dividend Growth Stock was originally published by The Motley Fool