Don’t let Nvidia‘s (NASDAQ: NVDA) 1.7% decline on May 21 fool you. The chip giant’s first-quarter fiscal 2027 report was every bit of a showstopper, featuring $81.6 billion in quarterly revenue — a 20% quarter-over-quarter and 85% year-over-year increase. Even more impressive is that Nvidia converted a mind-numbing 65.6% of its revenue into operating income in the period ended April 26.
Despite its behemoth size, Nvidia is defying the laws of business physics by maintaining a breakneck top- and bottom-line growth rate, which is leading to more cash flow than Nvidia needs to reinvest in its business.
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As a result, Nvidia’s board of directors approved an additional $80 billion share-repurchase authorization and announced a massive increase in its quarterly dividend from $0.01 per share to $0.25 per share. Here’s why Nvidia’s dividend increase makes it even more of a screaming buy now.
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Nvidia’s dividend increase makes perfect sense
In March, I correctly predicted that Nvidia would make a substantial dividend increase in 2026 based on comments from CFO Colette Kress at the company’s GTC 2026 conference. Kress said that Nvidia plans to return at least 50% of free cash flow (FCF) to shareholders through dividends, especially in the second half of the year as it works through some investments. And given that Nvidia’s buyback program is already massive, and its dividend was just $0.01 per share (a yield of 0.02%), a dividend raise was the logical next step in Nvidia’s evolution into a mature, industry-leading tech giant rather than a high-flying cyclical growth stock.
Nvidia initiated its dividend back in 2012, and while it was somewhat meaningful at the time, the payout became comically small as the stock soared in value. Nvidia’s latest dividend raise doesn’t make it a high-yield stock, but it will have a yield around 0.4%, which is in the ballpark of other tech giants like Apple (NASDAQ: AAPL), Alphabet, and Meta Platforms.
However, some investors may prefer Nvidia to reinvest that capital into the business rather than return it directly to shareholders. After all, there’s a long list of formerly innovative tech companies that became dividend-paying stalwarts, only to lose market share over time. But Nvidia is different.
Despite increasing its payout by 2,400%, Nvidia will only be paying around $6.08 billion per quarter in dividends or $24.3 billion per year. Nvidia just booked $58.3 billion in net income in a single quarter. So even if Nvidia’s growth slowed, it could simply pull back on buybacks with plenty of dry powder to support its dividend.
Nvidia’s future business model supports high-margin recurring revenue
Nvidia can easily afford its massive dividend, leaving plenty of cash to buy back gobs of stock. But the bigger prize for long-term investors is that Nvidia’s business model could become less cyclical over time while still capitalizing on new frontiers in artificial intelligence (AI).
Nvidia’s growth over the last few years is largely due to selling chips and associated hardware for data center applications. Now that large language models (LLMs) have become more sophisticated, hyperscalers are broadening their focus from AI training to AI inference — which uses AI agents and tools to apply the model’s knowledge base. Inferencing has different needs than training, which is why Nvidia has been expanding beyond graphics processing units (GPUs) to control a larger share of the hardware and software stack. On its May 20 earnings call, Nvidia said that it expects $20 billion in revenue this year from its new Vera Rubin central processing units alone — showcasing its ability to open new revenue streams beyond GPUs.
Nvidia is building an AI ecosystem for the age of inferencing. “As a key enabler of AI, we will make investments necessary to deliver the industry’s lowest cost per token and the highest token throughput, which will help our customers and partners scale and expand the AI frontier,” Kress said on the May 20 earnings call.
Inferencing could create a recurring revenue stream for Nvidia and make it less dependent on one-time chip sales. As generative and physical AI applications scale, hyperscalers will seek solutions that process tokens quickly and cost-effectively. Tokens are measurable chunks of text, code, and images. These data nuggets are basically the currency of AI — similar to how kilowatts measure electricity usage.
As applications and agents are built on Nvidia’s stack (using its hardware and software), Nvidia generates recurring revenue from services like Nvidia AI Enterprise and Virtual GPU support services. It also expands its ecosystem, which could one day mirror Apple’s blueprint.
Like Nvidia, Apple used to be cyclical and depend on spikes in consumer electronics spending. Apple is completely different today. Customers can have multiple products in the ecosystem that complement each other and amplify the payoff when they’re eventually upgraded during a refresh cycle. In the meantime, Apple collects subscription revenue from services.
As the use cases for agents and physical AI (such as robotics and self-driving cars) expand, hyperscalers will need to update their capabilities to deliver on customer needs, just as the iPhone’s processing and camera capabilities are light-years ahead of earlier models.
A foundational AI stock to anchor any portfolio
The biggest risk to Nvidia is that it drastically overestimates AI agent and physical AI demand, and that AI inferencing doesn’t lead to recurring, high-margin revenue. For now, the company’s results are still heavily driven by the cyclical boom in AI spending, as hyperscalers upgrade infrastructure built for general IT needs to meet AI demands.
However, skepticism is arguably already baked into Nvidia’s valuation — as the stock trades at just 33.7 times earnings, which is dirt cheap for a company growing as quickly and as profitably as Nvidia.
Should you buy stock in Nvidia right now?
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Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
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