AI stocks are booming—but they’re an absolute “dividend desert” for us contrarian income-seekers.
Or are they?
Most tech stocks—and I’d put AI darling NVIDIA (NVDA), with its pathetic 0.02% yield, at the top of the list here—don’t pay dividends when they’re growing quickly.
Only later, when growth slows, do they “find religion” and return cash to shareholders as dividends and buybacks. That’s too bad for those of us who like to have more than one way—price gains—to book returns on our stocks.
But what if we could find a way to grab more of our AI profits as dividends—particularly growing dividends—so we don’t have to “buy and hope” for price gains alone?
We can if we employ a “pick and shovel” approach.
During the gold rush of the 1840s, hordes flocked to California to get rich mining for gold. But the guys who made the real money didn’t actually mine anything. They were the entrepreneurs who sold the “pick and shovels” (as well as booze and lodging) to the hapless speculators.
3 “Pick-and-Shovel” Dividends to Cash in on the AI “Gold Rush”
The three stocks we’ll talk about next are ideal “pick and shovel” plays on the AI boom: The first is a California- (and Texas-) based utility set to profit as AI drives power demand through the roof—to 85 terawatts a year by 2027, according to Scientific American. That’s more power than many small countries use.
Another is an apartment landlord whose ultra-modern units are coveted by Silicon Valley’s tech set. This “back-door” play on tech’s—and AI’s—ongoing growth has hiked payouts for 30 straight years. The third is a cell-tower operator that’ll benefit as AI-powered apps drive up data demand.
Let’s get going, starting with …
Sempra: AI’s Heavy-Duty “Battery”
Sempra (SRE) is the utility that’s best-positioned to leverage AI’s bottomless appetite for electricity, thanks to its presence in two of America’s top tech markets—one well-established (California), and one many folks see as the next Silicon Valley: Texas.
Let’s start with California, where Sempra has 25 million customers in the southern and central parts of the state. Despite recent tech layoffs (more on those below), California created 260,000 jobs in 2023, according to the Public Policy Institute of California, a rate that matched pre-pandemic levels.
But Texas, where Sempra has 13 million customers and operates 143,000 miles of transmission lines, is the real growth driver here.
The state’s tech sector is en fuego: according to the Texas Economic Development Corporation, 17,600 tech firms now call Texas home, where they employ some 203,700 workers. In Austin alone, the number of tech jobs jumped 9.8% in 2022, according to the city’s chamber of commerce.
All of this builds a strong case for Sempra—and its stellar earnings history drives the point home—management continuously sets a 6% to 8% EPS-growth target … and continuously crushes it!
No wonder the payout (current yield: 3.5%) is on a growth tear .. and it’s pulled up the share price with it, too. That connection is a phenomenon I call the “Dividend Magnet”—and we’ve seen in dividend stock after dividend stock. Watch it work its magic:
Check out that orange line, which pops every time Sempra hikes its payout. Until recently, that is, when the rate panic hit the stock (just as it did with pretty well all bonds and “bond proxies” like utilities). That’s our opportunity to pounce, before Sempra’s price (inevitably) closes the gap with the payout.
Essex Property Trust: Reliable Payouts From the “Home” of AI
Our next “hidden” AI dividend is a real estate investment trust (REIT) with thousands of apartments in Silicon Valley.
That might sound like a bit of a strange move, given the tech-sector layoffs we’ve seen. But panics like these are exactly when we contrarians unearth our best dividend deals. And in this case, the layoffs the media breathlessly rambles on about are really just a correction after Meta Platforms (META) and friends overdid it in the pandemic.
Here are the facts: even with the layoffs, the 20 biggest tech firms still employ 37,000 more people than they did in 2019, according to the Silicon Valley Index. And growth is returning, with the area adding 2,700 net jobs from June 2022 to June 2023.
And now, with the AI arms race running hot—with $17.9 billion going into AI start-ups alone in the third quarter of 2023—and other tech trends (remember cloud computing?) still going strong, now is a good time to invest in the region at a bargain.
Essex Property Trust (ESS) is a great way to do it. The REIT pays 3.8% and has 62,000 units across three tech hotspots: northern California, southern California and Seattle, with the bulk of its net operating income coming from the former two—exactly the setup we want for our AI-powered real estate dividend!
Heck, there’s even an EV angle here, with Essex having a presence in Fremont, California, home to a Tesla (TSLA) Gigafactory!
These forces are all supporting Essex’s cash flow—and dividend, which has grown yearly for 30 straight years.
Dividend magnet? Check! Essex’s share price has tracked its payout point for point. And as with Sempra, we’re getting that same buy window, as the price has (for now) fallen behind the payout, mainly due to overwrought worries that rates will stay high:
The dividend is safe, with occupancy at 96.3% (measured on a preliminary basis for January and February 2024), delinquencies at 1.5% (down 40 basis points from the 2023 average) and same-property revenue forecast to rise 1.7% in 2024. A more sustainable hiring pace in Silicon Valley will drive that growth going forward.
SBA Communications: AI’s “Wiring”
Finally, let’s round out our AI-powered portfolio with SBA Communications (SBAC), which has 40,000 towers in North America, South America and Africa.
AI-powered apps will only make cellphones more addictive (yep, it’s possible!). Not good news for conversation, but great news for SBA. The company only began paying a dividend in 2019. And the payout has been on a growth tear since, surging 130%.
The stock was on a tear, too. But then 2022 hit, rates rose, and SBA sank with other REITs. Management kept paying its dividend, raising it annually, but it didn’t matter. The rate freight train temporarily flattened SBA shares:
Cell towers are a costly business to build but a fantastic one to run. It’s expensive to erect a tower, but the wily operator can then add a second and third tenant to the tower at a minimal incremental cost.
SBA’s dividend reflects this, but its stock price does not. Thank you, higher rates, for giving us a rare opportunity to buy this company in the bargain bin.
Vanilla investors see SBA’s 1.8% yield and yawn, but we contrarians know better. But unlike with, say, NVIDIA, which can only pay us through price gains, we have three ways to win with SBA:
The 1.8% yield.
- The potential for the stock to surge when rates fall. After all, SBA’s price must catch up with its Dividend Magnet.
- Future dividend increases, to the tune of 20%+ yearly if history is any guide.
Finally, we’re nicely set up geographically here. While SBA’s main competitors, American Tower (AMT) and Crown Castle International (CCI), have expanded across the globe, SBAC does three-quarters of its business in the US.
That’s exactly where we want to be as American growth rolls on, thanks in part to megatrends like AI-driven productivity gains and the continued “onshoring” of manufacturing as more US companies move their operations home.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
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