Millions of us invest for a second income. We might not need a second income today, and we haven’t quite figured out our timeline for the future.
But here’s something most income investors get wrong: the best dividend stocks of tomorrow may be paying nothing at all right now.
Remember this
Cast your mind back to 2000. Microsoft paid zero dividend. Apple paid zero. Both were growth machines — cash being reinvested, shareholders rewarded through price appreciation alone. Income investors wouldn’t have touched them.
Fast-forward 25 years, and the picture looks very different.
Microsoft began paying dividends in 2003 and has grown them every single year since. Investors who bought near the post-crash lows around $20 (split-adjusted) are now collecting roughly 15% yield on their original cost price — before counting a share price that’s up around 2,000%.
Apple followed a similar path: Jobs refused dividends for years, calling them a sign of weakness. Today, Apple returns over $90bn annually to shareholders through dividends and buybacks.
Not every story ends that way. Cisco also paid nothing in 2000 and now yields around 3%. But the share price has literally just regained its dot com era highs.
There’s our prophetic story — the risks are clear. Identifying which of today’s zero-dividend growth stocks will become tomorrow’s Microsoft is genuinely hard. Many won’t.
A future dividend champion?
Nvidia‘s forward dividend yield is 0.02%. That’s obviously tiny. However, there are some good signs.
The payout ratio — the percentage of net income paid out to shareholders in the form of dividends — is just 0.84%. That means dividend payments are covered more than 119 times by net income. In turn, this tells us that’s there’s plenty of room for growth even if earnings flatline — which I hope they won’t.
Will Nvidia stand the test of time? Honestly, I can’t say for certain. My prediction is that Nvidia and SpaceX will be the largest companies in the world in a decade from now. But I know as little as anyone else.
For now, it’s worth recognising that Nvidia is part of the infrastructure backbone of the AI revolution — and its financials reflect that dominance in extraordinary fashion.
Revenue hit $215.9bn in its last fiscal year, up 65% in a single year. Operating margins stand at 60.4% — a figure most companies could only dream of. Return on equity is 107.6%.
These are the numbers of a business that owns the picks and shovels of the most important technological shift in a generation.
There are obviously risks. One that’s often highlighted by bears is the circular nature of funding in the sector — with some pointing to examples of Nvidia investing into companies so they can use that money to by Nvidia’s chips.
But that’s only part of the demand story. And, for what it’s worth, I absolutely believe Nvidia is still worth considering. Seventy-odd institutional analysts agree, with the share price target 48% ahead of the current share price.
