Wall Street offers few, if any, guarantees. But among the short list of perceived certainties is investors' desire to flock to next-big-thing trends. At the moment, nothing is captivating investors' attention quite like the rise of artificial intelligence (AI).
In simple terms, AI involves the use of software and systems to handle tasks normally overseen by humans. What makes AI so special is the incorporation of machine learning, which is what allows software and systems to "learn" and evolve over time. In other words, AI can make the workplace more efficient from a production and creative standpoint. It's why PwC believes AI can provide a $15.7 trillion lift to the global economy by 2030, with the biggest positive impacts being seen in China and North America.
Image source: Getty Images.
Predominantly high-growth artificial intelligence stocks like Nvidia and Meta Platforms have played a key role in the vast outperformance of the Nasdaq Composite and Nasdaq 100 this year. However, it is possible to gain AI exposure while holding stakes in mature businesses that pay a dividend.
Although there aren't too many AI stocks that also pay a dividend, two stand out as surefire buys for patient investors, while another high-yield AI stock is probably best avoided.
Artificial intelligence dividend stock No. 1 you can confidently buy: Intel (1.43% yield)
The first AI income stock that looks like a phenomenal value for long-term investors is semiconductor giant Intel (INTC 1.49%). Despite cutting its payout earlier this year, Intel is still doling out a more-or-less S&P 500-matching 1.4% yield.
Shares of the company have been clobbered over the past three years for two reasons. First, it's been feeling the heat of competitive pressures from Advanced Micro Devices (AMD +6.69%), which has been chipping away at its central processing unit (CPU) share in personal computers (PCs) and data center servers. The other issue for Intel is a significant slowdown in PC and data center component orders with the worst of the pandemic in the rearview mirror. The result being a historic first-quarter loss for the company and double-digit declines in core sales categories during the first six months of 2023.
NASDAQ: INTC
Key Data Points
While it's crystal clear that Intel is working through some near-term headwinds, the company's foundation, which includes its AI ambitions, looks rock-solid.
For instance, CPU market share losses to AMD haven't been as extreme as feared. Though AMD has certainly added share, Intel still holds the lion's share of CPU sales in PCs and data center servers. This should lead to plenty of operating cash flow that the company can direct into high-growth initiatives, of which three come to mind.
To start with, Intel is aiming to become the world's No. 2 foundry service by the end of the decade. It's broken ground on two chip-fab plants in Ohio and recently announced plans to construct another plant in Germany.
A second growth opportunity can be found with Mobileye Global (MBLY +0.38%), the advanced driver assistance systems (ADAS) company that was spun off last October (Intel still holds a majority of Mobileye's outstanding shares). Mobileye's chips are a perfect example of AI in action, which is helping to make driving safer. With new vehicles becoming more reliant on technology, demand for Mobileye's chips should only head higher.
Lastly, Intel has an opportunity to become a key infrastructure player. The introduction of its AI-focused Falcon Shores graphics processing unit (GPU) in 2025 should help it secure share in high-compute enterprise data centers.
NASDAQ: AVGO
Key Data Points
Artificial intelligence dividend stock No. 2 you can confidently buy: Broadcom (2.22% yield)
The second AI dividend stock long-term investors can buy right now is Broadcom (AVGO +5.06%). Though Broadcom's yield of 2.2% might appear pedestrian, the company has increased its quarterly payout by nearly 6,500% since 2010. On a total return basis, including dividends, shares of Broadcom are higher by more than 2,800% over the trailing-10-year period.
The biggest headwind Broadcom is contending with at the moment is the growing expectation that U.S. economic growth will soften. Chipmakers and tech stocks are cyclical, which means they're prone to weakness when economic growth slows or shifts into reverse.
However, Broadcom's backlog can play a big role in helping the company successfully navigate recessions. Though CEO Hock Tan hasn't been too forthcoming of late with Broadcom's backlog, the company entered the previous year with a record number of orders to be fulfilled. Considering that Broadcom has been booking orders roughly a year in advance, it's probably safe to assume that the company's operating cash flow will remain highly predictable.
Broadcom should also receive a healthy boost from the 5G revolution. Since it took wireless providers around a decade to meaningfully improve wireless download speeds, there should be a multiyear period where consumers and businesses look to upgrade their devices to take advantage of faster networks. Next-generation wireless chips and accessories found in smartphones comprise a sizable portion of Broadcom's net sales.
But it's the company's AI ambitions that may be its biggest source of future growth. For instance, Broadcom unveiled its Jericho3-AI chip in April. Jericho3-AI is capable of connecting up to 32,000 GPUs in high-compute data centers, which is critical for the split-second decision-making required of advanced AI systems.
Additionally, Broadcom offers automotive solutions of its own, which includes ADAS. The company's Hydra provides an end-to-end Ethernet connection that makes video distribution possible within next-generation vehicles.
Image source: Getty Images.
The high-yield artificial intelligence stock you should avoid: IBM (4.64% yield)
However, not all AI dividend stocks are necessarily worth buying. Despite offering a juicy 4.6% yield, tech stalwart IBM (IBM 1.49%) is an AI-inspired company that investors can safely leave out of their portfolios.
To be completely fair, IBM does have a few factors working in its favor. For one, it's profitable on a recurring basis and should have no trouble remaining profitable for the foreseeable future. With a payout ratio that's just shy of 70% of Wall Street's consensus earnings for 2023, IBM's 4.6% yield also looks sustainable.
Further, I'll give IBM plenty of credit for its hybrid cloud focus. While some workers have returned to the office following the COVID-19 pandemic, we're seeing more people than ever work remotely. Demand for mixed-cloud solutions that cater to public and private clouds is growing, and IBM is well-positioned to fill that need.
NYSE: IBM
Key Data Points
But the company's AI solutions have left a lot to be desired. Despite being a pioneer in AI innovation with Watson, IBM has been unable to reignite its growth engine for roughly a decade. After peaking at nearly $107 billion in annual sales in 2011, IBM is on track to deliver around $62 billion in full-year revenue this year. Though it spun off Kyndryl Holdings in November 2021, this still doesn't come anywhere close to explaining the relatively steady decline in IBM's sales over the past 12 years.
IBM's acquisitions have also been unable to demonstrably boost sales. IBM has made dozens of acquisitions over the past decade that were designed to bolster its hybrid-cloud solutions -- after it was late to the game shifting to cloud solutions -- and fuel its AI ambitions. In spite of this merger-and-acquisition-focused strategy, IBM's sales are, as noted, well below 2011 levels.
To add, IBM's share repurchase program failed to create value for shareholders. Since 2000, IBM has spent in excess of $140 billion repurchasing its own stock, yet its market cap, as of the closing bell on Aug. 11, was just $130 billion. Even including its supercharged dividend, IBM has seen the benchmark S&P 500 outperform its shares by 220 percentage points since the start of the century.
Though IBM has successfully reinvented itself a couple of times throughout its storied history, it's not quite there yet with its latest attempt. That makes it an easy AI stock to avoid.
