This Overlooked Dividend Stock Could Be a Quiet AI Winner

Key Points

• IBM has emerged as a leader in AI and quantum computing.

• Despite considerable increases, its dividend yield is about double that of the S&P 500.

• A reasonable forward P/E ratio arguably makes the stock a buy.

• 10 stocks we like better than International Business Machines ›

Artificial intelligence (AI) has driven huge returns for investors, particularly in a select few large-cap stocks. Every stock in the "Magnificent Seven" has benefited from the technology, and some smaller players have also earned outsized returns.

Amid such gains, investors may forget that some of the oldest tech stocks in existence have made notable pivots into AI. Knowing that, it might be time to pay particular attention to the comeback in International Business Machines (NYSE: IBM) stock, and here's why.

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The reemergence of IBM

In a sense, one can forgive investors for overlooking IBM. While other tech stocks increased in value in the last decade, IBM stock steadily dropped as its legacy tech businesses fell out of favor.

The tide began to turn in 2019, when a division head named Arvind Krishna spearheaded the $34 billion purchase of Red Hat. That move made IBM a major player in cloud computing, particularly with hybrid cloud technologies, and the company's board promoted Krishna to the CEO position the following year.

That move was critical to AI because companies utilizing the technology turn to the cloud for the computing power and data storage capabilities needed to train AI models and deploy solutions globally. In IBM's case, this happens through watsonx, which helps customers train, validate, refine and distribute AI models.

Additionally, its AI capabilities could enhance the company's leadership in quantum computing. Unlike traditional computers, which only process 0s and 1s, quantum computing technology can store values in between those values, exponentially increasing its computing power.

IBM has the world's largest fleet of quantum computers, and by 2029 it expects to release one that is "fault tolerant." This is critical due to the technology's high error rates, which could potentially give IBM a competitive advantage in that burgeoning field.

IBM by the numbers

Despite the company's spinoff of Kyndryl in 2021, the slow-growing legacy business had hindered its growth. However, that might be changing. In the first half of 2025, revenue of nearly $32 billion grew 4% compared to the same period in 2024. This included an 8% annual increase in the second quarter.

It was also enough to allow operating income to grow by 14% yearly during the first two quarters of the year. Still, the $3.2 billion IBM earned during that period declined by 5%, primarily due to significantly higher income tax expenses.

Even with that hiccup, IBM forecasts $13.5 billion in free cash flow, which, if the prediction holds, will increase from $12.7 billion in the prior year. This is far above the expected $6.2 billion in dividend costs and bodes well for IBM's payout, which has risen for 30 straight years. The dividend now stands at $6.72 per share annually, and its dividend yield of 2.4% is approximately double the S&P 500 average.

Such results, along with IBM's improved technologies, have stoked some long-overdue optimism in the stock. Since Krishna took over in April 2020, IBM's total returns have exceeded those of the S&P 500, as the stock has recently set new record highs.

IBM Total Return Level data by YCharts

With this progress, investors should note that IBM stock has become more expensive. Its P/E ratio is now 45, far above the 10 P/E ratio at the time Krishna took the helm at IBM.

Nonetheless, even with the stock price growth, its forward P/E ratio stands at just 25. That valuation and IBM's resurging growth make the stock a buy despite its recent gains.

IBM is a quiet AI winner

After years of struggles, IBM stock is again a winning investment for investors.

Thanks to a visionary decision to acquire Red Hat, IBM has positioned itself as a leader in the cloud, making its AI capabilities more critical to its customers. That leadership could also reach the next level as IBM steps up innovation in the quantum computing field.

The stock has experienced considerable growth under Arvind Krishna's leadership. However, a relatively low forward P/E ratio and a high dividend yield strongly indicate that investors can still profit from the bull run in IBM stock.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and Kyndryl. The Motley Fool has a disclosure policy.