Artificial intelligence (AI) might feel like the part of the stock market where all the action is right now. But investors shouldn’t forget about dividend shares.
UK dividend shares have – as a group – outperformed US tech stocks over the last 12 months. So whether it’s growth or passive income, investors shouldn’t think AI is the only game in town.
Investment returns
Over the last year, the iShares S&P 500 Information Technology Sector UCITS ETF, which tracks the S&P 500 tech sector, has returned 11.3%. That’s not bad, but there are a couple of issues.
One is that – despite all the recent enthusiasm around AI – this is actually less than the S&P 500 as a whole. The entire index is up just over 13% since June 2024.
Importantly, it’s also less than the iShares UK Dividend UCITS ETF – an ETF that holds a collection of UK dividend shares. This returned 13.69% during the last 12 months.
There doesn’t seem to be much between them, but the dividend ETF has also returned 5.3% in cash to shareholders. That takes the total return to almost 19%, which is a big difference.
Why the outperformance?
UK dividend shares outperforming US tech is all the more striking given the returns from the stock market overall. On both sides of the Atlantic, share prices have been reaching new highs.
Conventional wisdom, however, states that growth stocks are supposed to outperform when prices are going up. Dividend shares, on the other hand, provide resilience when things get tough.
One big reason the US tech sector has underperformed is that some individual constituents have put up some very poor results. Adobe (NASDAQ:ADBE), for example, is down almost 35%.
It’s difficult for an index as a whole to outperform in a positive year when some of its constituents put up big negative numbers. Especially without the cash provided by dividends to offset this.
AI risks and opportunities
The rise of new technology can be a threat as well as an opportunity. Adobe has dominated the creative software industry, but competing products driven by artificial intelligence are now starting to emerge.
The firm benefits from high switching costs, meaning it’s not easy for customers to move to an alternative product. But investors are becoming wary about its competitive position.
Uncertainty about Adobe’s pricing power and growth prospects is affecting the stock’s valuation. Over the last year, the price-to-earnings (P/E) ratio the stock trades at has gone from 51 to 24.
Analysts still generally have a positive view of the stock and I think it’s worth considering. But the last 12 months have been a good illustration of the fact that investing in tech stocks can be unusually risky, as well as rewarding.
Warren Buffett
According to Warren Buffett, the first rule of investing is to not lose money. Over the last year, the returns from US tech stocks have been a good illustration of the importance of this rule.
Despite some outstanding gains from the likes of Palantir, the sector as a whole has struggled to overcome declines in its weakest performers. Adobe is one example, but it isn’t the only one.
By contrast, the steady returns from the UK’s blue-chip dividend shares have resulted in better performance. And that’s an important lesson for investors to take note of.
