Is Nvidia the Most Underrated Dividend Growth Stock to Own?

When you think of Nvidia (NASDAQ: NVDA), dividends probably aren't one of the things that come to mind. But given just how much the company generates in earnings and how much room it has to grow its dividend, that could change in the future. Apple and Microsoft are two top tech companies that have been paying and increasing their payouts for years.

Nvidia, with some deep pockets and terrific growth prospects, may be an even more intriguing option in the future. Recently, it announced a massive increase to its dividend. Could this be a sign that it's becoming more serious about its dividend, and could that make the stock a more appealing option for income investors?

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Nvidia's dividend increases by 2,400%

Nvidia's dividend up until now has been fairly nominal, just a single cent. But the dividend it recently announced will be much more significant -- $0.25. That translates into an increase of 2,400%. At $1 per year in dividends per share over the course of a full year, that puts its yield at around 0.47%. It's still well shy of the S&P 500 average of 1.1%, but it's now higher than Apple (which yields 0.35%) and isn't as far behind Microsoft's yield of 0.87%.

In 2024, Nvidia's dividend technically rose by 900% due to its 10-for-1 stock split. There's no denying that Nvidia could afford to make more increases to its dividend given how robust its earnings are; in its most recent quarterly results, the company's diluted earnings per share totaled $2.39 and could easily cover a year's worth of dividend payments. With a minuscule payout ratio, Nvidia's strong financials could enable it to continue to grow its dividend at high rates for the foreseeable future, but that doesn't mean that will happen.

Why large dividend increases might not be the norm for Nvidia

Tech companies typically rely more on share buybacks as opposed to dividends when it comes to rewarding their shareholders. Even though highly profitable businesses such as Apple and Microsoft have the ability to make more generous increases to their payouts, they don't. Dividend payments can create obligations and expectations that impede a company from focusing on growth. Nvidia's recent increase may have been aimed at simply putting its yield in line with that of other tech stocks rather than being indicative of it turning into a top dividend growth stock.

Nvidia is primarily a stock that's going to be suitable for growth investors. While the yield is a nice bonus, that's the best way to look at it, as the bulk of the returns you'll likely generate from Nvidia's stock will come from its rising share price, rather than the modest dividend income you'll get from it.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.