BofA’s Favorite Non-AI Stocks. Plus, Nvidia’s Penny Dividend | Barron's Streetwise

Key Concepts

• 2026 Market Outlook: Predictions and price targets for the stock market in 2026, with a focus on the S&P 500 and cryptocurrency.
• Nvidia's Dividend: The extremely low dividend payment of Nvidia and its significance as a broader market indicator.
• Dividend Investing: The historical importance of dividends in total returns, their role during market downturns, and their current unfashionable status.
• Dot-com Bubble: A historical comparison to the current market environment, highlighting the dangers of chasing price gains and neglecting fundamentals.
• Dutch East India Company: The origin of joint-stock companies and dividends, demonstrating their foundational role in the stock market.
• S&P 500 Dividend Aristocrats: An index of companies with a long history of increasing dividend payments.
• BFA Securities Research: A report identifying 16 stock picks that are not related to AI, offering opportunities away from the dominant tech theme.
• AI Trade: The current market focus on Artificial Intelligence stocks and the potential for a shift away from this theme.
• Valuation Bloat: The current high price-to-earnings ratios in the stock market, particularly in mega-cap tech stocks.
• Total Return: The combination of capital appreciation and dividend income.
• Free Cash Flow: The cash a company generates after accounting for capital expenditures.

2026 Market Outlook and Current Valuations

The podcast begins by discussing the influx of "2026 look ahead" reports for the stock market. One report from an unknown source suggests "2026 will break the 4-year crypto cycle," while another from Barclays, citing Venu Krishna, sets a 2026 S&P 500 price target of 7400, up from 7000, driven by rising earnings estimates and continued mega-cap execution, particularly in the AI race. This target implies approximately 12-13% upside.

However, the speaker expresses caution, noting that stocks appear "very expensive," with the S&P 500 trading at 25 times earnings. While not predicting an immediate crash, the speaker acknowledges that crashes "just happen every so often" and the timing is unpredictable. This presents a dilemma for investors: either stick with the S&P 500 and hope for continued gains, or diversify for downside protection, potentially missing out on the high returns of AI stocks.

Nvidia's Dividend: A Penny and a Broader Story

A central theme emerges around Nvidia's dividend, which has dwindled to a mere "penny per share per quarter," resulting in a yield of 0.002%. For an investor holding $1 million in Nvidia stock, this translates to only $2 in cash annually. Despite this negligible payout, Nvidia investors have seen massive gains of 24,000% over the past decade.

The speaker argues that Nvidia's penny dividend is indicative of a broader market trend where many companies have "skimped on dividends" as stock prices have surged. This has led to the S&P 500's current dividend yield of just 1.1%, which the speaker likens to "finance's vestigial tailbone."

Historical Perspective on Dividends

To illustrate the significance of dividends, the speaker takes a historical journey:

• January 1999 (Dot-com Bubble): Dividends were out of fashion, with investors prioritizing rapid price appreciation. The speaker recounts the story of "Tandyman," who invested heavily in AOL and used credit card cash back to cover living expenses, ultimately losing everything when the bubble burst. During this period, the S&P 500's yield bottomed out around 1.1%, and dividend payments fell below one-third of earnings, compared to a historical average of over one-half. The dot-com crash saw the S&P 500 lose half its value and the NASDAQ composite lose three-quarters, taking 15 years for the NASDAQ to recover its 2000 peak (excluding dividends).
• November 2012: Nvidia, then focused on video gaming and supercomputing, launched a dividend that yielded 2.4%, and the stock rose 8% in a day. This period marked a resurgence in the popularity of dividends.
• March 1602 (Dutch East India Company): The speaker traces the origin of dividends to the Dutch East India Company, a joint-stock company that made cash payments to shareholders and retained capital, creating a perpetual stock and leading to the establishment of the world's first stock exchange in Amsterdam. This highlights that "dividends gave birth to the stock market, not the other way around."
• November 2019: Nvidia's dividend increase was halted for the first time since its inception, coinciding with the growing realization of AI's potential.

The Enduring Value of Dividends

Despite the recent underperformance of dividend-focused strategies compared to the broader S&P 500 over the past decade (e.g., S&P 500 dividend aristocrats lagging behind), the speaker presents compelling evidence for their long-term importance:

• Long-Term Returns: From 1973 to the end of the previous year, companies that grew or initiated dividends returned an average of 10.2% annually, significantly outperforming non-payers. Companies that cut or eliminated dividends had negative average returns.
• Contribution to Total Returns: Since 1960, dividends have contributed 85% of the S&P 500's total returns, primarily due to the power of compounding over long periods. Even over intermediate decades since 1940, dividends accounted for 34% of total returns.
• Downside Protection: During market downturns of 10% or more since 1975, dividend-paying companies lost an average of 14.4%, while non-payers fell twice as much (approximately 14 points more). Dividends "shine brightest is during downturns."

The current market's dividend yield has reached lows comparable to the dot-com bubble, with companies prioritizing earnings growth over dividend payouts.

Strategies for Dividend Investing

For investors looking to buck the trend and incorporate dividends, the speaker suggests:

• ProShares S&P 500 Dividend Aristocrats ETF (NOBL): Offers a 2.2% yield with a 0.35% expense ratio.
• Schwab US Dividend Equity ETF (SCHD): Based on a rigorous screening for sustainable yield, it offers a 3.8% yield with a very low expense ratio of 0.06%. This ETF is noted for not being heavily concentrated in big tech or finance and trades at a price-to-earnings (P/E) ratio of 16.7, close to the historical average of around 15 for US stocks.

The speaker advocates for a "stripped-down financial nudism philosophy" but believes that actively pursuing dividends might be necessary.

Nvidia's Financial Strength

Despite its minimal dividend, Nvidia's financial health is extraordinary. Wall Street estimates it will generate over $93 billion in free cash flow this year and $151 billion next year, surpassing Microsoft and soon Apple. This is after only around $5.5 billion in annual capital expenditures and a $1 billion dividend cost.

Opportunities Away from AI: BFA Securities Research

The second part of the podcast shifts to opportunities outside the dominant AI theme, featuring TJ Thornton, Head of Research Marketing at BFA Securities. BFA's report, "When the spotlight becomes too hot, opportunities away from AI," identifies 16 buy-rated stocks with little to no AI exposure.

Key Stock Picks Discussed:

• Eversource Energy (ES): A regulated utility in Connecticut, benefiting from a less burdensome regulatory environment.
• Freeport-McMoran (FCX): A copper miner. While copper is indirectly linked to AI (due to its use in electronics), the stock has been depressed by a mine disaster. BFA is bullish on copper and has upgraded Freeport to a buy.
• KeyCorp (KY): A cyclical bank that is not defensive. Its appeal lies in its potential to benefit from economic broadening, increased capital expenditures, and M&A activity.

Broader Rationale for the Research:

Thornton explains that the report aims to highlight neglected stocks that don't fit the AI theme, especially if the market is nearing the end of the AI trade. The list is diverse, encompassing defensive and cyclical names, and is not intended as a prescriptive portfolio but rather a broad selection for investors to consider based on their orientation.

Market Sentiment and Outlook

Regarding the current market wobble, BFA's US equity strategist, Svita, remains "reasonably optimistic" with a 12-month target suggesting an 8% return, which is considered average. She prefers a "broadening story" beyond mega-caps, as AI-related mega-caps have become very capital-intensive. She notes that capital expenditures to operating cash flow for hyperscalers are at the same level as US oil majors, suggesting high multiples for AI stocks are not justified.

Differentiation within the "Mag 7" is also observed. Amazon's cloud business, directly benefiting from AI, was met with investor enthusiasm. Meta, while also investing heavily in AI, saw its stock tank after indicating future spending without immediate returns. This highlights the importance of stock picking and demonstrating a clear line of sight to returns on capital expenditures.

Dividends: A Vestigial Organ or a Resilient Strategy?

The conversation returns to dividends, with the speaker reiterating their unfashionable status. The example of Disney raising its dividend by 50% still resulted in a low yield of around 1.4%. The S&P 500 dividend yield is around 1%, its lowest in decades.

However, the speaker believes dividends could be an answer to investor anxieties, offering income to reinvest at lower prices during downturns. TJ Thornton points to Michael Hartnett's fund manager survey, which indicates a net 20% of respondents believe companies are overinvesting. The antidote, according to the survey, is a focus on balance sheets. While not explicitly stating dividends, this sentiment suggests a potential shift back towards dividends and buybacks as companies may curb excessive growth spending.

Conclusion

The podcast concludes by emphasizing that while the market is heavily focused on AI, there are opportunities elsewhere. Dividends, though currently out of favor, have a strong historical track record of contributing to total returns and providing crucial downside protection. The current market valuation and the potential for a shift in corporate spending priorities could lead to a renewed appreciation for dividend-paying stocks. The BFA Securities report offers a starting point for investors seeking to diversify away from the AI theme.