ChatGPT was publicly launched in November 2022 and quickly went viral, becoming the fastest growing app in consumer internet history. While the public was busy sending each other AI-generated poems or cheating on their GCSE homework, the market broadly shrugged. Microsoft, through its partnership with ChatGPT’s creator OpenAI, benefitted from some additional interest but equity markets were distracted by Federal Reserve policy and the recession that never was.
It took chip giant Nvidia’s blowout second quarter guidance in May 2023 to open investors’ eyes to the opportunity. The company had grown up supplying Graphics Processing Units (GPUs) to gamers, but the technology had evolved to sit at the heart of generative AI model training. By telling analysts that it expected second-quarter revenues to jump over 60% year-over-year, it signalled to the world that the AI revolution was already here and there were trillions of dollars at stake.
The next day the stock surged 28%, adding $185bn of market cap, and the mania for AI beneficiaries began in earnest. Attention quickly gravitated towards the rest of mega-cap US media and technology. In the absence of tangible, commercial AI-driven products, the market saw these incumbents as the most likely to harness and scale the technology first. The “Magnificent Seven” was born and 2023 ended up seeing one of the most concentrated market rallies in history.
Sadly for equity investors with a preference for income, this tsunami largely passed them by. As of 2023 year-end, only two of the seven paid a dividend one could describe as more than nominal. Four paid no dividends at all. This begs the obvious question; can income-oriented investors access this phenomenal growth theme at all?
Our response is a resounding YES! AI-fuelled revenue and profit growth is plentiful within the world of dividend-paying stocks, you just need to look a little harder and think a little differently. You also need to compromise a little on headline dividend yield as a trade-off for compounding dividend growth, though that’s typically a sound strategy across market cycles.
OpenAI and Nvidia don’t exist in a vacuum. They have deep and complex supply chains and a burgeoning customer base away from consumer facing apps. Nvidia’s GPUs are built in Taiwan by Taiwan Semiconductor Manufacturing Corp (TSMC), a company with a 2.1% current dividend yield and a history of shareholder-friendly, double-digit dividend growth. TSMC makes these chips using tools from Dutch company ASML and Japanese manufacturer Tokyo Electron, stocks where the yields are a little more modest at c.1%, but with growth genuinely turbo-charged by the semiconductor arms race.
Even further upstream sits Shin Etsu, the Japanese silicon wafer giant upon whose shimmering 12 inch discs these astoundingly complex designs get printed. It offers a 1.8% yield, growing at a healthy clip, and also substantial share buybacks from its $12bn cash pile.
Once-built, Nvidia’s chips get installed in server racks in data centres worldwide. These are incredibly electricity hungry processors and substantial power and cooling infrastructure is required to satisfy them. French electricals company Legrand has meaningful exposure here with the company estimating each Nvidia-powered server requires 4x as much of its components compared to a typical CPU-powered server. The company offers a 2.2% yield growing at a high single digit rate.
