Does CuriosityStream Stock's 12% Dividend Make It a Buy?

There are few things more exciting for stock market investors than passive income. And CuriosityStream (NASDAQ: CURI) stands out because it combines a significantly above-average yield of 12.2% with immense growth potential as it seeks to scale up its business model. Let's dig deeper into the pros and cons of this tiny video streamer to decide if the sky-high dividend payout makes the stock a buy.

What went wrong for CuriosityStream?

Hindsight is 20/20. And looking back over the last few years, it is clear that many stocks that went public through special purpose acquisition companies (SPACs) have sharply underperformed the market because of challenges like lack of business maturity and equity dilution. Curiosity Stream is an excellent example of this phenomenon, with shares down by roughly 72% from its original SPAC unit price of roughly $10.

The company was hit hard by the dramatic drop in investor interest in stay-at-home stocks after the easing of lockdowns and movement restrictions after the COVID-19 pandemic. Since then, management has been trying to engineer a turnaround and convince investors it's worth taking another look. Second-quarter earnings give valuable insights. Revenue grew 22% year over year to $23.2 million, driven mostly by licensing revenue, which jumped 48% to $14.1 million. This segment refers to the money Curiosity Stream gets from allowing other media companies to use its vast library of educational content.

The company's video library has also caught the attention of generative artificial intelligence (AI) clients, which can use it to help train their models. However, Curiosity Stream's long-term AI efforts stand to be much more exciting than just feeding finished content into video models. It has begun offering access to its video creation techniques, such as its synchronized multi-camera action sequences, to research labs, which can help them train AI models on video editing workflows.

Management's willingness to work with AI companies could give CuriosityStream a unique niche and widen its economic moat compared to large rivals like Netflix, which don't need the revenue stream and tend to view AI video generators as a threat instead of an opportunity.

Is the 12.2% dividend sustainable?

There are many ways to assess the sustainability of a dividend. But I like to compare it to profits and profit growth because these are the main things that will make the payout possible over the long haul. The good news is that Curiosity Stream's bottom-line results are good for now.

Unlike most early-stage growth stocks, Curiosity Stream has managed to couple its growing revenue with a falling cost of revenue. This probably has a lot to do with its evolving revenue breakdown as it shifts toward higher-margin video licensing and AI training deals. The pivot away from chasing subscriber growth and the increasing focus on enterprise clients has also allowed management to slash its advertising budget.

Image source: Getty Images.

Over 12 months, the company has increased its gross margin from 53.4% to 72.8% and cut its operating expenses by 24.1% -- sending second-quarter operating income up by over 1,800% to $9.18 million. This comfortably exceeds the $5 million the company paid out in dividends and the $0.6 million in share repurchases during the period.

With cash and equivalents of $10.9 million and no debt, the company is in a strong position to maintain its payout for the next few quarters (assuming it can replicate the large AI deals it secured in the second quarter). And it looks like a high-risk, high-reward buy for investors who prioritize income and believe the AI boom is here to stay.

That said, Curiosity Stream's decision to maintain such a large dividend is unorthodox for a small growth-focused company. And the payout may represent the majority of long-term returns investors should expect for owning the stock. After all, these are earnings that could have otherwise been reinvested into the business to generate future growth.

Will Ebiefung has positions in CuriosityStream. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.