Nvidia Stock Exploded in 2024: How to Protect Your Portfolio From a Reversal for the Rest of the Year

Nvidia’s valuation might be getting stretched, but you can hold the stock and still protect your portfolio.

The onset of multiple artificial intelligence (AI) applications across many industries has vaulted Nvidia (NVDA 4.57%) into the spotlight among investors. That has led shares of the chipmaker to soar 150% in the first half of 2024. And that includes a retracement of nearly 10% in the final two weeks of June.

The stock’s upward trajectory began last year as Nvidia’s data center sales soared. Shares have exploded in response, with a gain of 745% since the start of 2023. That raises the question of how much growth is built into the stock, and whether shares have run too far, too fast.

Is it time to sell Nvidia?

No stock goes up forever, as Nvidia’s recent correction from its record high price reinforced. With even a forward price-to-earnings (P/E) ratio of about 45, any slowdown in earnings and sales growth will likely clobber the stock price.

But the company is not just selling the most in-demand hardware for data center AI computing power. It is also integrating its CUDA computing platform and programming model software on its graphics processing unit (GPU) architecture. That’s giving customers a more integrated solution and puts Nvidia another step ahead of any competition.

The incredible demand for all the potential uses of AI has provided a long runway for the company to continue growing. But competition will inevitably increase, and either its sales growth or profit margins will peak.

However, investors don’t need to try to time that peak and sell shares to reap short-term gains. After all, Nvidia’s long-term outlook remains bright, even if there is a plateau or drop in the stock in the back half of this year. Instead, investors can bolster other areas of a portfolio to protect against a nerve-racking drop.

Balance your equity portfolio

One direction investors should go is to add a healthy dose of dividend-paying stocks to holdings. That steady income can provide needed ballast against a high-flying, volatile stock like Nvidia should it begin a free fall. It’s also helpful to look outside of the tech sector to add diversity.

Dividends have been a meaningful part of market returns over the years. In fact, since the 1940’s, a decade-by-decade look shows that dividend income has contributed an average of 34% to the total return of the S&P 500 index.

bar chart showing impact of dividend income to total return of the S&P 500 index.

*Total return for the S&P 500 index in the 2000s was negative. Data sources: Morningstar and Hartford Funds. Image source: Hartford Funds.

3 dividend stocks to buy now

When looking for dividends, one of the first sectors that comes to mind is real estate investment trusts (REITs). That’s because REITs are required to return at least 90% of taxable income to shareholders in the form of dividends in exchange for special tax advantages.

One of the largest and best-known REITs is Realty Income (O 0.04%). Calling itself The Monthly Dividend Company for its payout schedule, the REIT has been diversifying its real estate holdings and geographies. Its share price was recently trading near a three-year low, even as its funds from operations were close to a high.

O Chart

O data by YCharts.

One reason the share price lags right now is the competitive yield available from ultra-safe Treasury bills. But the REIT’s 5.8% dividend yield will look more enticing if and when the Federal Reserve begins lowering interest rates. That is expected to begin as early as this year, making now a good time to buy into Realty Income.

Another beneficiary of lower rates will be Brookfield Infrastructure Partners (NYSE: BIP) and its corporate-structured variant Brookfield Infrastructure Corp. (BIPC 0.50%). Brookfield is a proven allocator of capital but also relies on debt to grow its lucrative investment portfolio. Brookfield recently recycled some assets and used proceeds to acquire Triton International, the largest owner and lessor of intermodal containers. With prices for sea containers spiking, that purchase should provide more returns than originally anticipated.

Other assets include a globally diversified mix of transportation infrastructure, utilities, energy transmission and storage, data centers, and cell towers. Brookfield also has a high dividend yield as its stock price has drifted lower in the current interest rate environment.

BIP Chart

BIP data by YCharts.

Garmin (GRMN -0.21%) is a third stock to consider for added diversification. Its dividend pays a modest 1.8%, but the seller of GPS-enabled devices for outdoor enthusiasts provides exposure to the consumer products segment.

It also has a history of steady dividend increases and a balance sheet flush with $3.3 billion in cash and equivalents. The company has no debt and a significant cash flow stream.

That cash — and cash flow — provide a cushion that should help keep Garmin’s dividend increasing in the future. The company has steadily increased its payout over the past decade, with the dividend rising by more than 50% over that time. And after it reported 20% sales growth in the first quarter, investors can likely expect management to boost full-year guidance if it has another solid report from the second quarter

The bottom line is that Nvidia might be overvalued right now, but trying to time selling at a short-term peak is a fool’s errand. Its prospects warrant holding the stock for the long term with a long runway for its AI products as well as its other segments like technology for self-driving vehicles.

Instead, investors should look at adding less-volatile dividend stocks that also have promising outlooks for the back half of 2024. In the end, that can help a stock portfolio grow without creating undo stress for investors.

Howard Smith has positions in Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, Garmin, Nvidia, and Realty Income. The Motley Fool has positions in and recommends Garmin, Nvidia, and Realty Income. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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