When most investors think of dividend stocks, they're usually thinking of safe, steady, and even boring businesses with low volatility. But it's important to note that not all dividend stocks fit this stereotypical mold.
So we asked three top Motley Fool investors to each discuss a dividend payer that they believe bold investors might appreciate. Read on to learn why they chose NVIDIA (NASDAQ:NVDA), GameStop (NYSE:GME), and Gap (NYSE:GPS)
Steve Symington (NVIDIA): It's almost strange to remember that NVIDIA pays a dividend after watching the value of its shares more than triple over the past year -- though it's worth noting that the dividend now yields a modest 0.4% annually.
To that end, I'm not the only investor to argue that NVIDIA's gains were justified when valuation multiples expanded following its stunning acceleration in top- and bottom-line growth late last year. And if NVIDIA's latest quarterly beat is any indication -- shares most recently skyrocketed in May, when it revealed that first-quarter revenue climbed 48% year over year to $1.94 billion, while adjusted earnings rose 85% to $0.85 per share -- the market only continues to underestimate the potential for NVIDIA's GPU technology to play a central role in multiple high-growth industries.
"NVIDIA's GPU deep-learning platform is the instrument of choice for researchers, internet giants, and start-ups as they invent the future," added NVIDIA founder and CEO Jensen Huang at the time. "One industry after another is awakening to the power of GPU deep learning and [artificial intelligence], the most important technology force of our time."
Of course, to buy NVIDIA stock now is to bet that we're still in the early stages of its growth. And while I agree with that train of thought, I also recognize that shares could pull back hard on any signs of weakness. But over the long term, I think this is a winner that will keep on winning, and more market-beating gains are in store for investors bold enough to buy NVIDIA shares even after its astronomical rise.
Old-school video-game retail stores: Risky business, indeed
Anders Bylund (GameStop): Video-game retailer GameStop started paying quarterly dividends in 2012. The payout has seen six increases in less than five years, adding up to a total dividend boost of 153%. Not too shabby.
The dividend yield has raced upward even faster, of course. A 2% effective yield in November 2013 has turned into a staggering 7.2% yield today. That's great, until you consider the other half of the skyrocketing dividend yield equation -- plunging share prices:
That's where your bold investing style comes in. Buying GameStop and its massive dividend can only make sense if you believe that the shares will stop plunging at some point, and preferably very soon. That's very far from a safe bet.
The company is suffering from a new era in video-game sales, where many consumers prefer smartphone and tablet gaming over GameStop's full-fledged consoles, and even the consoles come with their own online app stores these days. And even if you really want a physical disc, online retailers are only a few clicks away. Gamers are running out of reasons to visit their local GameStop. This is why the plunging share prices and rising dividends make perfect sense.
So GameStop is retooling. The $140 million GeekNet buyout two years ago gave the company a fresh start in pop-culture collectibles, based on the new asset's ThinkGeek brand. Collectibles should account for roughly $700 million of top-line sales in 2017. That would be up from just $76 million in 2014, the last fiscal year before the GeekNet acquisition.
Video-game hardware and software sales are plummeting while the collectibles division grows by leaps and bounds. You can pick up GameStop as a dividend play if you believe that the newfound collectibles business will make up for the shrinking game market in the long run.
But you do need guts of steel to make that move. Bold investors only, please.
Contrarian to the max
Tim Green (Gap Inc.): Betting on a brick-and-mortar retailer in the age of Amazon.com takes some guts. Betting on a mall-based apparel retailer requires some industrial-strength boldness. Predicting which of these retailers will survive and which will perish is tough. Gap Inc., known for its namesake stores as well as Banana Republic and Old Navy, looks to have a better chance than most.
Gap is struggling, with overall comparable sales declining for much of the past few years. Old Navy has been a standout in recent quarters; an 8% rise in comparable sales during the first quarter of this year was its strongest performance since late 2014. But the higher-end Gap and Banana Republic brands aren't faring well, and that has hurt the company's bottom line.
Gap's revenue has declined for two years in a row, and both gross and operating margins are slumping as well. Net income in 2016 was down almost 50% from 2014. This steep decline raises some questions about the safety of the dividend. Gap stock currently yields about 4%, but the payout ratio last year surpassed 50%. The dividend isn't in danger yet, but it will be if earnings continue to plummet.
Gap showed some signs of life during the first quarter, with sales essentially flat and net income rising. Those are good signs, but the company will need to string together multiple quarters of positive results before the market believes the turnaround is for real. Investors willing to bet that the worst is over for Gap can lock in a 4% dividend yield, but the risk that the turnaround unravels should be on their minds.