Making Sense of Artificial Intelligence (AI) Hype for Dividend Investors
The tale of two markets continued in May. The S&P 500 finished the month up 0.5% despite losses of 4% to 6% for the utilities, health care, consumer staples, real estate, and financials sectors.
The tech sector, which accounts for nearly 30% of the S&P 500, was an exception again, ripping higher by 9%. Excluding tech, the market would be about flat this year, instead of up around 10%.
The chart below from The Wall Street Journal shows the notable performance divergence in recent months between cash-rich growth stocks and smaller and value-oriented stocks, many of which pay dividends.
Source: The Wall Street Journal
As we discussed last month, large-cap tech stocks with great cash flow, pristine balance sheets, and essential products and services can serve as safe shaven when investors worry about the economic outlook. But in May, growing hype around artificial intelligence (AI) drove the tech sector’s outperformance.
AI buzz has grown louder since Microsoft-backed OpenAI released its ChatGPT tool in late 2022. The computer program, which you can try for free, crunches tons of internet information to learn different patterns, features, and relationships within the data.
ChatGPT uses this learned knowledge to make predictions, generate outputs, have conversations, answer questions, and help with many kinds of tasks.
In my limited experience playing around with ChatGPT, I found the tool’s ability to understand and generate human-like text quite remarkable. Investors have, too.
Shares of chipmaker Nvidia, now the fourth-largest constituent in the S&P 500 with a market cap near $1 trillion, have rocketed over 160% higher this year.
The firm’s second-quarter revenue guidance, issued on May 24, surpassed analysts’ estimates by more than 50% as data-intensive AI applications have raised demand for certain semiconductor chips.
Even with earnings per share now expected to nearly triple in the year ahead, Nvidia shares trade at a forward P/E ratio north of 40, baking in a long runway for AI-fueled growth.
Similarly, semiconductor peer Marvell saw its shares rally over 30% on May 26 after management indicated that its AI business would likely more than double this year.
AI accounted for just 3% of Marvell’s sales last year, and the stock trades at a forward P/E ratio of 34 despite having a history of inconsistent earnings growth.
This exuberance and fast money can tempt investors to jump on the bandwagon. But as a boring, conservative dividend investor, the latest fads rarely interest me until their staying power becomes a lot clearer. I’m reminded of Berkshire’s 2000 shareholder letter:
“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future, will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
– Warren Buffett
AI could turn out to be overhyped or take much longer to have a material impact on many tech companies’ bottom lines. Future regulatory actions represent another wild card. Technological changes are simply hard to predict – and getting them wrong can be especially costly if an investor piles in near the top of the hype cycle.
We don’t plan to make any changes to our portfolios in response to the AI movement underway. But assuming AI capabilities continue to advance, some of our companies should benefit – even if they are not as directly exposed as certain tech plays.
It only seemed fitting to ask ChatGPT about the biggest potential applications for AI. As you can see, the tool’s stated possibilities span nearly every industry and cover a wide range of opportunities for businesses to improve productivity and innovation:
Healthcare: AI can assist in diagnosing diseases, analyzing medical images, developing personalized treatment plans, and improving patient outcomes.
Finance: AI can be used for fraud detection, risk assessment, algorithmic trading, customer service chatbots, and personalized financial advice.
Manufacturing: AI can optimize production processes, predictive maintenance, quality control, and supply chain management.
Retail: AI can enhance customer experience, personalize recommendations, optimize inventory management, and enable cashier-less stores.
Transportation: AI can improve autonomous vehicles, traffic management, logistics optimization, and predictive maintenance of vehicles.
Education: AI can support personalized learning, intelligent tutoring systems, automated grading, and adaptive educational platforms.
Cybersecurity: AI can detect and respond to cybersecurity threats, identify patterns of malicious activities, and strengthen overall network security.
Energy: AI can optimize energy usage, predictive maintenance for power grids, and enable smart energy management systems.
Entertainment and media: AI can personalize content recommendations, automate content creation, enable virtual reality experiences, and enhance audience analytics.
Of course, AI has many downsides, too. In the Wild West that is the online financial world, gurus and marketing pundits can now take even more shortcuts. ChatGPT can write articles in seconds. Pumping out flashy content to unsuspecting investors has never been easier.
While I would love to publish more research, I care the most about maintaining your trust. And that means publishing quality, accurate, and objective information. No exceptions. Sure, I could see us using ChatGPT to help with mining data or analyzing text. But we will never cut corners or blindly believe what a machine tells us.
Ultimately, our small team will keep doing what we’ve been doing for nearly eight years now: continuously improving our website and sharing thoughtful, human-produced research that helps you maintain a stable dividend portfolio aligned with your goals.
Call us old fashioned, but listening to our members and finding ways to better meet their needs has worked pretty well. Your support (and referrals – we don’t do any advertising) has meant so much to us, and I am humbled by the opportunity to hopefully continue working on Simply Safe Dividends for many years to come.
We won’t get everything right, but we will always approach everything we do – from developing new features to conducting Dividend Safety Score research – with the highest standards possible.
Circling back to recent events, pressure continues to build from persistent inflation, higher-for-longer interest rates, and tightening credit. Corporate bankruptcy filings have hit their highest number since 2010, and the pace of dividend cuts has picked up in recent months.
I don’t have a crystal ball, but I’d guess the outlook for dividends will get darker before inflation is tamed. We continue combing through our coverage universe of stocks and closed-end funds daily and will keep doing our best to help you focus on what matters most to protect your dividend portfolio during these uncertain times.
