Artificial Intelligence and Dividend Growth Investing
We’re probably all familiar by now with the Gartner Hype Cycle which says that a technology will go through a phase of unrealistic expectations (hype) before it goes crashing down, and then re-emerges sans hype so that everyone can profit from it. It seems like we’re starting to flirt with peak hype for artificial intelligence (AI) based on irresponsible articles lately talking about how to profit from the AI boom. Then there’s the fact that we now have somewhere in the range of 3,000 AI startups that have been funded by eager venture capitalists. As retail investors, we want to know what this means for our portfolio. Maybe the only picks and shovels pure-play stock for AI has been shares of NVIDIA which have gone completely apeisht (that’s a technical term that finance people use behind closed doors). There are other stocks trying to ride these coattails, and we remain convinced that there aren’t many pure-play AI stocks out there for retail investors. What we are certain of is that every single company out there will now be looking to “use AI” so they don’t get left behind.
There are going to be generally two types of companies that are using AI:
- Type 1 – Those who have a core business already and will use AI to create efficiencies
- Type 2 – Those who have developed AI as a technology into a product offering (ideally via a SaaS offering)
The first type of company will eventually be everyone who doesn’t fall into the second type. That’s what people mean when they say “AI is becoming the new electricity”. In other words, if a company is not actively looking at how they plan to use AI going forward (whether that’s homegrown or through a product offered by a Type 2 Company), then they’re going to become extinct. This means that you need to start evaluating your portfolio holdings to see which companies are actively addressing AI as a means to remain competitive. The ideal investment opportunity here, will be a stock that’s priced for value but is making capital investments like a growth stock would. Walmart is a good example of this.
We’ve held Walmart in our own personal portfolios for quite a while now for reasons that have nothing to do with technology and everything to do with a growing income stream. Our core investment strategy is not taking punts on technology stocks but rather something called “dividend growth investing” or DGI. This strategy advocates allocating the majority of your equity exposure to an industry-diversified portfolio of at least 30 stocks that have a track record of not just paying dividends every quarter but growing them every single year. Companies that do this properly establish a track record of performance that gives investors’ confidence. How much confidence?
Walmart has increased their dividend every single year for the past 44 years. That’s like your boss giving you a raise every year for the past 44 years. Can you even imagine a company that gave every single employee a raise, every single year, that was greater than inflation? How much greater than inflation? Let’s take a look at the past 17 years of dividend payments that WMT shareholders would have enjoyed amounting to an average yearly increase of +14.8%:
The above example assumes that you invested $10,000 in Walmart back in 1999 with a yield of 3.5%. In that case, you would have made your money back in dividends by 2009 and by 2016, would be making more than a 34% yield on your original investment. A monthly payment of $29 would have grown to $290. That’s not even taking into consideration stock price appreciation which would have been an increase of about 92% on your original investment:
Of course that’s historical data, which means that nothing says WMT will continue paying raises of an amount that exceeds inflation. In fact, we see that in the past few years they’ve paid less than inflation. We’re actually okay with that though, because that cash is now being poured into technology that will allow them to compete with Amazon (like their acquisition of Jet.com). More recently, Walmart has stated their plans to build a cloud infrastructure made up of NVIDIA chips that will store their vast amounts of data. While everyone else just uses Amazon’s cloud infrastructure, Walmart decided against Amazon’s servers because they know their data is incredibly valuable and they don’t want Amazon’s sticky fingers all over it. All of Walmart’s delicious big data will be fed to artificial intelligence algorithms which will then result in greater efficiencies and better margins which will translate into more dividend increases for shareholders. These investments in technology are particularly attractive when you consider that Walmart is largely considered a “value” play. What does that mean exactly?
If you’re worried about a recession or worried that tech stocks might crash, then Walmart is worth a look. That’s because Walmart has a beta of .3 which means that it’s less likely to rise or fall based on overall market movements. In fact, one could argue that Walmart might actually perform better if the market crashes and people flock to the cheapest source of goods they need to live (also called consumer staples which have always been a defensive sector). We want to find more examples of stocks with a profile like Walmart and invest in them. Here’s a list of all stocks with a market cap greater than $50 billion that have been increasing dividends for 25 years or more:
|Altria Group Inc.||MO||48|
|Illinois Tool Works||ITW||43|
|Johnson & Johnson||JNJ||55|
|Procter & Gamble Co.||PG||61|
|Walgreens Boots Alliance||WBA||42|
|Wal-Mart Stores Inc.||WMT||44|
You can bet that every single company listed above will need to adopt artificial intelligence in order to increase efficiencies so that they can continue increasing those dividend payments. That promise of increased dividend payments helps us enjoy a retirement where our quality of life increases as time goes on as opposed to those poor souls who wonder if they have enough money to feed themselves before they finally kick the bucket.
This year, we wrote about how the first real pure-play artificial intelligence IPO has been confidentially filed, a very interesting company called Afiniti. We’re stoked because up until now, we’ve only been able to identify a small handful of stocks that would be considered to be plays on AI as a product (like “overpriced” Nvidia”). How the heck are we going to make money when AI takes our jobs if we can’t invest in it?
In a recent article, we speculated that one of the possible scenarios for Marc Cuban’s AI trillionaire is in fact Warren Buffet himself given the man’s present wealth and given that many “boring businesses” will likely reap huge benefits from AI. We then proposed that perhaps the safest way to invest in AI is by investing in an S&P tracker ETF using the following logic:
- Passive investing beats active investing 80% of the time
- The biggest companies today will benefit the most from AI in the long run
- Buy some of the ETF each month so you avoid market timing (called dollar cost averaging or DCA)
If we pursue a strategy like that and substitute an actively managed 30-stock portfolio of DGI stocks that we buy and hold forever (unless they stop increasing dividends), we might be in pretty good shape assuming that all these companies are in fact making commitments to investing in AI. Of course, you can supplement all that boredom you’ll be experiencing with some shares of strong and exciting tech stocks like NVIDIA or Illumina. You can also look at any AI IPOs that start to sprout up but just be aware that not all of these are created equal.
Now that AI hype is peaking, expect to see all kinds of little known companies “getting into artificial intelligence” and broadcasting this far and wide. This simple intent should not command a price premium. The fact is, the best companies out there have already made AI investments. They have bigger war chests. There will be losers. The companies that have made investors extremely wealthy are those who were able to increase shareholder value in the face of any financial crisis (like the global financial crisis of 2007-2008) or over-hyped technology (like the dot-com bubble). Any company that’s been increasing dividends for 25 years in a row is certainly one that’s proven it can handle crisis and capitalize on new technologies all the while.
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