Dividend investing is an area some investors like to focus on because it provides a nearly guaranteed income stream. However, the highest-yielding dividend companies also tend to grow more slowly, so generating a greater total return than the stock market involves a combination of dividend yield and stock price appreciation.
However, I think most investors are better suited to finding stocks that are growing rapidly and paying dividends. These companies can grow their dividends over the next decade, turning a small payment today into a huge payout a decade or more from now.
There is no greater growth sector than artificial intelligence (AI) right now. Fortunately, several companies in this realm pay dividends. Although they may not be the highest yields, that could change over the next few years as cash flows explode from new AI business units.
Image source: Getty Images.
The five dividend stocks I want to focus on today are Nvidia (NVDA 5.93%), Taiwan Semiconductor Manufacturing (TSM 6.60%), Alphabet (GOOG 0.80%) (GOOGL 0.82%), Microsoft (MSFT 2.55%), and Meta Platforms (META 5.50%). These five companies are the ones you'll see on the list of the best AI stocks to buy, but dividends are rarely a part of the investment thesis. That's because dividends aren't the focus right now — raw growth is. Companies like Alphabet, Microsoft, and Meta Platforms are plowing every bit of unspent money they can into data centers.
Meanwhile, Nvidia and Taiwan Semiconductor are supplying these companies with components necessary to fill these data centers with computing devices. As a result, they are able to focus a bit more on their dividend. From a payout perspective, none of these stocks has a yield greater than 1%.
NVDA Dividend Yield data by YCharts
While Nvidia looks like it barely pays a dividend, that's changing. During its last earnings report, Nvidia announced a dividend increase from $0.01 per share to $0.25 per share. That works out to about a 0.45% yield, which isn't breathtaking, but it is an improvement.
As for the others on this list, don't expect a hike anytime in the future because all of them announced major capital expenditure plans this year. That will likely eat up any chance of a hike in the near future.
Overall, the dividends from these five aren't going to change your returns too much, as most returns will come from the raw growth of the companies. However, they have major potential to hike them over the next few years.
Seeing how much a company pays in dividends is only one part of the equation. What investors also have to focus on is the payout ratio, or what percentage of earnings is paid out as dividends. Some popular dividend stocks include companies like JPMorgan Chase, Johnson & Johnson, and Caterpillar. JPMorgan and Caterpillar pay out upward of 30% of their earnings, while Johnson & Johnson pays out 60%. The group of five AI stocks is far lower than that, with only Taiwan Semiconductor and Microsoft coming close to those figures.
NVDA Payout Ratio (TTM) data by YCharts
As a result, all of these companies could pay more to shareholders if there weren't a huge opportunity in AI. Once the AI build-out is wrapped up, a dividend may be the best place for cash to go, and a dividend hike could follow. That may or may not pan out, but I'm still confident in the long-term potential returns that these five could provide just from an AI investment perspective. With the potential for dividends to substantially rise over the next decade, the prospects look even better.
JPMorgan Chase is an advertising partner of Motley Fool Money. Keithen Drury has positions in Alphabet, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Caterpillar, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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These AI stocks could massively grow their dividends over the next few years when cash flows are freed up.
5 Solid Artificial Intelligence (AI) Stocks That Also Pay Dividends – The Motley Fool
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