AI’s Power Hunger Creates New Dividend Opportunity for Investors
As demand for electricity surges due to the rapid growth of artificial intelligence, a new investment opportunity is emerging in the power generation and utility sectors.
The pursuit of income isn’t just about the dividend payout; investors are increasingly focused on total return, including potential price appreciation. A strategy of timing buys to capitalize on market shifts can yield significant results. Recent gains in mortgage REITs, Annaly Capital and Dynex Capital, demonstrate this principle.
Two months ago, Annaly Capital (NYSE: NLY) was highlighted as a compelling income play, offering a 12.9% dividend backed by a well-funded income stream and potential for growth. The recommendation was based on a key tenet of income investing: as interest rates fall, REITs tend to rise. This “rate-REIT seesaw” proved accurate, with Annaly’s price increasing as anticipated. According to reports, Annaly has returned 14% in two months, equivalent to an annualized gain of 115%.
Investors who followed with a second recommendation, Dynex Capital (NYSE: DX), have also seen positive results. Dynex, yielding 14.7% at the time, benefited from historically high mortgage spreads. Since then, the stock has delivered a 5% gain, or 56% annualized.
While these gains are impressive, analysts suggest focusing on the next income opportunity. The current focus on AI – chips, models, and software – obscures a critical constraint: electricity.
“Every prompt, model update, and shiny new app runs on racks of servers in data centers,” one investment strategist explained. “They don’t sip power. They chug it, huffing and puffing 24/7.” Demand for electricity is escalating rapidly, outpacing supply.
A recent agreement between the Trump administration and several Northeastern governors aims to address this challenge. The unprecedented plan would require tech giants – including Amazon, Microsoft, and Alphabet – to fund new power plant construction through 15-year contracts, regardless of their actual electricity usage.
This proposal has two key implications for investors. First, it ensures that the costs of AI’s energy consumption won’t be passed on to ordinary consumers. Data centers often lead to higher rates for residential and business users in surrounding areas. Second, and more importantly, the plan will create long-term, contract-backed revenue streams for power generators, grid infrastructure companies, and utilities – the kind of predictable cash flow income investors crave.
The initiative is expected to support approximately $15 billion in new power plant construction, backed by guaranteed revenue contracts. This will enable utilities to secure favorable borrowing rates to expand electricity generation capacity, ultimately boosting profits.
Reaves Utility Income Fund (NYSE: UTG) offers a diversified way to capitalize on this trend. UTG is a closed-end fund specifically designed for income investors, providing a monthly dividend of 6.3%. The diversified portfolio minimizes the need to monitor individual utility earnings.
Furthermore, UTG’s utility holdings function as “bond proxies,” meaning their performance is inversely correlated with interest rates. As rates decline, investors are likely to shift funds from money market accounts into these types of assets, potentially driving up UTG’s price and enhancing total returns.
“AI chips need juice. UTG owns the power brokers that provide it,” a market observer noted. “It’s the next ‘dividend train’ about to leave the station.”
For investors seeking further insights and timely dividend recommendations, a subscription to a service like the Contrarian Income Report may be beneficial. The report provides monthly updates on high-yielding stocks poised for growth, similar to the successful Annaly and Dynex recommendations.
Don’t miss the opportunity to benefit from this emerging trend. The next dividend payout from a top income play is imminent.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, “7 Great Dividend Growth Stocks for a Secure Retirement.”
