Dell Raised Its Quarterly Dividend by 20% This Year After Only Initiating Its Dividend Program in 2023. Can Passive Income Investors Trust the Stock?

It's been a banner year for Dell Technologies (NYSE: DELL), with its stock up nearly 325% at the time of this writing.

Like many other large tech stocks, it has found its place in the artificial intelligence (AI) supply chain, specifically with its AI servers, which have been in high demand this year as graphics processing unit (GPU) clusters and data centers scale.

As such, Dell has been able to distribute more capital back to shareholders, noticeably raising its quarterly dividend by 20% earlier this year. Dell only initiated its dividend program in 2023.

Can investors trust the stock for passive income?

Image source: The Motley Fool.

Why Dell's stock has exploded this year

While GPUs and other chips have been at the center of the AI trade, they need to interact with other components in a data center to obtain the capabilities needed to respond to queries from, say, a large language model.

Dell's AI-optimized servers integrate the chips, memory, and other necessary components that power them, including liquid cooling and data storage, into a full server and rack.

The company also performs quality control and then ships them to customers such as neoclouds and other large customers, including hyperscalers that operate their own data centers.

While Dell isn't the only company building and selling full-scale AI racks, it's been all hands on deck amid massive AI demand, resulting in shortages across the supply chain.

In its second quarter of fiscal year 2027, the company posted $47 billion in revenue, up 58% year over year, while diluted earnings per share of $6.34 surged 273%.

Management also lifted its full-year guidance from $167 billion to $192 billion, implying 69% annual growth.

"Demand is broadening across neoclouds, sovereigns, and enterprise customers, and our customer count has surpassed 6,500," Dell's Chief Operating Officer Jeff Clarke said on the company's most recent earnings call. "The scale and complexity of these deployments reinforce why customers choose us."

Can Dell's dividend be trusted?

It's pretty easy to see why Dell was able to raise its quarterly dividend by 20% to $0.63 per common share.

The much-improved financials have also contributed to a 224% increase in adjusted free cash flow in the second quarter. More free cash flow means more money for dividends. Dell's trailing-12-month free cash flow yield of 2.37% far exceeds its trailing dividend yield of 0.43%.

The payout ratio is also not high, with $2.52 in annualized dividends per share easily covered by this quarter's profits alone. The company is also repurchasing stock, with nearly $3.8 billion of share repurchases in the most recent quarter, which dwarfs the $405 million of dividend payments.

Now, obviously, the big question or future concern for Dell's dividend is what happens if AI demand dries up.

While there's certainly no evidence of this happening right now, the hyperscalers continue to raise their future guidance for AI-related capital expenditures, which could very well top $1 trillion next year. But it's hard to imagine this level of spending continuing like this forever.

When evaluating stocks for dividends, it's key for investors to consider what a company's earnings and free cash flow could be over the long term to estimate what a sustainable dividend looks like and how much it can be raised each year.

The good news is that Dell's $2.62 projected annualized dividend is still well below the $8.68 in diluted earnings per share the company generated in fiscal year 2026, or even the $6.38 it earned in fiscal year 2025.

This tells me that even if earnings were to slow considerably, Dell's dividend would still be covered, so I see no reason why the dividend can't be increased annually moving forward.

That said, Dell's 0.43% annual yield is not particularly attractive, so if you're purely focused on passive income, there are likely more attractive dividend stocks out there. But higher-yielding dividend stocks may not be able to tap into the AI trade like Dell can, for better or worse.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.