This AI Stock Is Also a Great Dividend Stock

When you think about cutting-edge artificial intelligence (AI) companies, generous dividend payments probably aren't on your radar. AI is a booming and fast-evolving industry, requiring massive investments to keep pace with the competition.

With International Business Machines (NYSE: IBM), investors can have their cake and eat it, too. IBM isn't trying to develop the most advanced AI models, which can cost an arm and a leg to train on pricey data center graphics processing units (GPUs). The company also isn't jamming AI into anything and everything as a way to justify big price increases and pay for prolific AI investments, like Microsoft's recent move to force AI onto Office users. Instead, IBM's AI strategy revolves around enabling other companies to deploy the groundbreaking technology to solve real problems.

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Staying out of the AI race

Startups and some tech giants are feverishly racing to develop more capable AI models, a costly endeavor. How any of these companies ever attain a competitive advantage is an open question. If the top AI models from OpenAI, Anthropic, and others are all roughly in the same ballpark in terms of capabilities, trained on largely the same data using similar techniques, the AI race will ultimately be a race to the bottom.

IBM isn't playing this game. The company's in-house Granite AI models are small, cost-effective, and can be fine-tuned to outperform larger models in specific tasks. If you're building an AI agent that's responsible for helping customers process returns, it doesn't need to be trained on all the world's information.

IBM's watsonx platform provides all the tools enterprises need to train, deploy, and manage AI models and agents. Important, watsonx can be run on multiple public clouds, making it a viable choice for clients that are all-in on Amazon's AWS or Microsoft's Azure.

While watsonx is a powerful platform, the secret to IBM's AI strategy is its consulting arm. Around 80% of IBM's AI-related bookings have been consulting signings, a strong indication that there's booming demand for AI implementation and related services.

With a focus on helping its clients deploy AI solutions in a way that delivers clear returns on investment and cost savings, IBM has emerged as an early leader in the enterprise AI industry.

A reliable dividend

It doesn't get much more reliable than IBM's quarterly dividend. Through thick and thin, IBM has paid quarterly dividends to investors without fail since 1916. The company has also raised its dividend annually for 29 years in a row, through multiple reinventions and transformations.

The current quarterly dividend of $1.67 per share works out to a dividend yield just shy of 3%. That's a solid dividend yield, especially considering the stock has surged more than 30% over the past year.

IBM's dividend looks sustainable. The company expects to generate more than $12 billion in free cash flow for 2024, with that number likely to rise in 2025 and beyond as IBM's hybrid cloud and AI strategies continue to pay off. Based on the current share count, the dividend will eat up just over half of the full-year free cash flow.

The company's dividend probably won't grow much faster than free cash flow for the time being, as it has been prioritizing reducing its debt load following the acquisition of Red Hat in 2019. But with a 3% yield, even modest dividend growth is good enough.

IBM's AI efforts won't make many headlines as the company largely works behind the scenes for its clients. But by filling an important niche in the AI industry, IBM can grow its AI business and free cash flow, and ultimately, its dividend over time. For dividend investors who want exposure to AI, IBM is tough to beat.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends Amazon, International Business Machines, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.