When you think of dividends, perhaps slow-moving industrial companies or real estate investment trusts (REITs) may come to mind. Most companies that pay dividends have few growth opportunities ahead, but what if you want to find stocks that are dividend payers and have appealing potential ahead of them?
Apple (AAPL 0.20%) and Nvidia (NVDA -0.02%) both fit in this box. These two companies have robust business models that have allowed them to see immense profitability and cash generation. These companies are using that cash to explore potentially lucrative spaces and are paying investors a dividend for their patience.
Here's why long-term investors should consider taking advantage of these great deals.
1. Apple
As one of the largest companies in the world, it's not all that surprising that Apple has enough cash flow to pay a dividend. The company has a dividend yield of 0.61%, which is small but represents over 14% of its net income. In the first six months (ended March 26, 2022) of its fiscal year, the company generated almost $60 billion in net income and $70 billion in free cash flow. The company uses this to buy back lots of stock and reinvest into its business; yet, there's still enough cash left over for this dividend.
What opportunities is Apple investing in? One of the most appealing areas Apple is exploring is augmented reality. The rumors are that Apple is developing virtual reality (VR) goggles and augmented reality (AR) glasses to come out in 2023 and 2024, respectively. Considering that Apple has been hiring employees in the AR/VR space, it makes sense that rumors are spreading.
The AR/VR market is expected to be worth over $450 billion by 2030, according to Allied Market Research, which could allow Apple to thrive given its unrivaled brand strength. Additionally, if these products connect with its pre-existing products, that could strengthen its robust ecosystem, making it easier for current Apple customers to adopt AR/VR spectacles.
Apple's primary concern is its size. Currently, it's worth $2.4 trillion, so for it to deliver market-beating returns over the next decade, the company would likely have to grow larger than $3 trillion -- breaking its own record for the biggest company ever by market capitalization. This is certainly possible, but beating this record by a large margin isn't something investors should expect.
Apple is, however, trading close to its lowest valuation since early 2020 at 24 times earnings. While this business might not deliver 1,000% returns over the next decade, it will likely provide steady gains, exposure to the emerging VR industry, and a nice dividend that will likely expand as the business continues to gush cash. For those reasons, you might want to ensure you have this technology staple in your portfolio.
2. Nvidia
Nvidia might not be the first stock to come to mind when thinking about dividends, but with a yield of 0.10%, it is a dividend payer. Additionally, this could get bigger in the future, considering the company only pays out 4% of its net income in its dividend.
Rather, most of its cash is getting funneled into capitalizing on the chip space. Nvidia is a leader in the gaming graphics processing unit (GPU) space with over 200 million gamers using its GeForce graphics cards. However, it also dominates other segments. The company has a 90% share in graphics for workstations in the professional visualization market, and 71% of the top 500 supercomputers rely on Nvidia's chips.
The company is also looking to gain prevalence in emerging segments like enterprise artificial intelligence and omniverse software. With all of these segments combined, Nvidia sees an industry worth $1 trillion. Therefore, it might make sense that most of its $9.5 billion in trailing 12-month net income is being spent here rather than on a dividend.
While the opportunity for Nvidia looks lucrative, it does not come without risk. The company faces stiff competition from companies like Intel and Advanced Micro Devices -- both of which also generate lots of cash. It's safe to say that this will be a fierce battle to gain share, but considering how big these segments are, it won't necessarily be a winner-take-all scenario.
The other risk to monitor is the company's valuation. At 42 times earnings, Nvidia isn't cheap, and investors might see some multiple compression ahead.
However, Nvidia looks too good to miss out on now. The company could rapidly expand over the long term given its massive potential. Additionally, as Nvidia gains share, it could decide to increase its dividend, making it even more attractive as a dividend play. Patient investors looking to see high growth and a rising dividend over the long term should consider adding Nvidia to their portfolio.
