Times like these are when dividend shares really shine. While share prices in the tech sector are flying around all over the place, income investors are just quietly watching the cash roll in.
Who cares about whether OpenAI’s spending commitments are going to crash the stock market? Isn’t it easier to just sit back and collect a steady income from businesses that keep making money?
AI speculation
The stock market of the last couple of years has been artificial intelligence-obsessed. Defence spending and weight loss drugs get honourable mentions, but AI has been the big focus for investors.
Right now, big tech companies seem to be in a race to see who can spend the most money in the shortest time. Microsoft is expected to spend $100bn this year and Alphabet is targeting up to $185bn.
At today’s prices, that’s enough to buy Spotify. Twice.
CEOs are confident that this is going to work out. But when one of the biggest customers is OpenAI – a company that loses money and intends to keep doing so – there’s definitely a risk.
Passive income
The drive to invest in AI is either going to work incredibly well, or it’s going to blow up spectacularly. And there are strong and credible voices on both sides of the argument.
Given this, investors might think the best way to earn good returns is to look for businesses that distribute their profits as dividends, rather than reinvesting most of them. And there are lots available.
In some cases, there are stocks with dividend yields as high as 7.5%. That means someone who invests £20,000 could collect £1,500 a year in cash just for holding on to their shares.
High dividend yields can often be a sign of risk. But spending $185bn on AI data centres in anticipation of future demand isn’t exactly a risk-free enterprise.
Real estate investment trusts
Real estate investment trusts (REITs) are some of the most obvious dividend stocks around. In exchange for tax exemptions, they’re required by law to return 90% of their income to investors.
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One example is Supermarket Income REIT (LSE:SUPR), which owns a portfolio of – unsurprisingly – retail properties. The stock comes with a 7.5% dividend yield and there’s a lot of stability going forward.
Tesco and J Sainsbury make up over half of the firm’s rental income. The good thing is that they’re unlikely to default, but the risk is that high concentration makes negotiating rent increases difficult.
The vast majority of Supermarket Income REIT’s leases have over a decade left and inflation-linked increases should help protect returns. So I think steady long-term income is a realistic possibility.
Diversification
One of the things investors shouldn’t forget is that they don’t have to go all-in on any particular strategy. A diversified portfolio can often be more resilient than a concentrated one.
There’s scope to participate in AI growth potential without getting too exposed to the inherent risks. And I think Supermarket Income REIT could be a nice way of going about this.
Share prices are volatile at the moment, as investors try to figure out what the implications of AI are going to be for corporate profits. But dividend shares might be a good way to bypass some of this.
