Eager to Capitalize on the AI Revolution in 2025? Consider This Stimulating Exchange-Traded Fund.
Eager to Capitalize on the AI Revolution in 2025? Consider This Stimulating Exchange-Traded Fund.
Advanced technology, specifically AI, is a thrilling domain. It has the potential to drastically reduce the time required to accomplish various tasks, thereby amplifying productivity. This technology has garnered such interest that corporations are splurging tremendous amounts of money into semiconductor chips to power it.
These chips demand a considerable amount of electricity. For instance, ChatGPT requires nearly 10 times more power to process a query compared to an average Google search. As the adoption of AI accelerates, it might lead to a more than 160% surge in electricity demand in the U.S. by 2030, primarily due to data centers that power AI applications, as estimated by investment bank Goldman Sachs.
This electricity surge could positively impact utility stocks. An effective method to capitalize on this trend is by purchasing shares of Vanguard Utilities ETF (VPU -0.27%). This Exchange-Traded Fund (ETF) holds numerous leading utilities that reap benefits from AI-driven electricity demand. The ETF's value has increased by 37% so far in 2022 and may have the potential to soar further in 2025.
Income Generation
Vanguard Utilities ETF aims to measure the return of stocks within the utilities sector. It holds companies that distribute electricity, water, and natural gas as well as those that operate power plants. Currently, the ETF contains 70 utilities.
The ETF's top five holdings are:
- NextEra Energy (NEE -0.36%): 11.7% of the fund.
- Southern Company : 6.8%.
- Duke Energy: 6.5%.
- Constellation Energy (CEG -0.92%): 5.8%.
- Sempra Energy: 4.3%
Notably, utilities generate highly predictable and stable earnings due to the consistent demand for electricity and the monopoly-like nature of these businesses, with rates regulated by government authorities. This stability enables these companies to offer above-average dividends. Currently, the ETF yields around 2.8%, which is over double the S&P 500's dividend yield (approximately 1.2%). This dividend serves as a substantial income stream for investors. For instance, investing $1,000 in this ETF would produce around $28 in passive dividend income annually.
AI-Driven Growth
The income stream is only one of the incentives of this ETF. Many of its top holdings anticipate significant growth in the near future driven by the AI surge.
For example, NextEra Energy is a forerunner in the development of renewable energy. The company anticipates a surge in renewable energy demands in the upcoming years. CEO John Ketchum stated during the third-quarter earnings conference call that:
U.S. data center power demand alone is predicted to rise substantially, adding approximately 460 terawatt hours of new electricity demand at a compound annual growth rate of 22% from 2023 to 2030. This could potentially enable 150 gigawatts (GW) of new renewable energy and storage demand over the same period.
This catalyst is one of the factors driving NextEra Energy's belief that it will more than double its renewable energy and storage capacity by 2027 (from 38 GW to 81 GW). This confidence stems from its projection that it can grow its adjusted earnings per share (EPS) at or near the upper end of its 6% to 8% annual target range through 2027. Simultaneously, the company expects to deliver dividend growth of around 10% annually through at least 2026, further adding to its attractive 2.8% current yield.
Constellation Energy is a leader in producing nuclear power. This year, the company signed a deal with Microsoft to revive its Three Mile Island Unit 1 generating unit, which it halted in 2019 for economical reasons. Microsoft agreed to purchase 100% of the power this unit will produce (837 megawatts) upon its restart in 2028 to power its cloud and AI operations. Microsoft is reportedly paying more than double the current market rate for this emissions-free electricity.
This deal complements the already strong growth Constellation Energy anticipates over the subsequent years. The power producer expects to see its EPS grow by more than 10% annually through 2028. This growth should support the increase in its dividend (current yield of 0.6%) at an annual rate of around 10% in the future.
Total Return Potential
Utility stocks deliver stable cash flow, enabling them to provide attractive dividends. This allowance empowers investors to passively profit from the AI boom by obtaining some passive income. Besides this income stream, these companies exhibit strong growth potential as the technology accelerates demand. By combining this growth with their income streams, utility stocks could potentially produce powerful total returns in the future. Consequently, the Vanguard Utilities ETF is a notable option for investors seeking exposure to this high-powered megatrend in 2025.
Investors looking to capitalize on the expected electricity surge due to AI adoption might consider investing in Vanguard Utilities ETF (VPU -0.27%). This ETF, which yields around 2.8%, holds utilities that benefit from AI-driven electricity demand and have the potential to soar further.
Moreover, many of the ETF's top holdings, such as NextEra Energy and Constellation Energy, expect significant growth driven by the AI surge. For instance, NextEra Energy anticipates a surge in renewable energy demands, aiming to more than double its renewable energy and storage capacity by 2027. Similarly, Constellation Energy, a leader in nuclear power, signed a deal with Microsoft to power its AI operations, forecasting over 10% annual EPS and dividend growth.
In summary, the Vanguard Utilities ETF can serve as a viable investment option for those seeking exposure to the AI megatrend, offering both stable income and potential growth.