Artificial intelligence (AI) is changing the world, from technology companies with science fiction-level products all the way down to the companies you rely on to live your everyday life. AI could reshape the future in ways we can't even imagine today. But there's one really important aspect of AI that we do understand and you can invest in it right now, perhaps reshaping your portfolio in a way you wouldn't have expected just a few years ago. Here's what you need to know.
What is artificial intelligence?
"Artificial intelligence," at least at this point, is a bit of an overstatement. AI is really just an efficient computer program that can analyze vast amounts of data very quickly to see patterns that regular humans would likely miss. It is very good at summarizing information but, at the same time, it isn't "intelligent," so it still makes bizarre mistakes. Ask an AI system to generate an image of a human being, for example, and you might end up with an image that looks great at first glance, but has some strange errors upon closer inspection.
Image source: Getty Images.
And that's just one example. There are others, including the technology's habit of making up data points. There are plenty of stories out there of people who relied 100% on AI to speed up a mundane task only to end up red faced after another human caught the AI's errors. In other words, we are still in the early stages of AI development. Picking the winners in the AI space is still fraught with risk. Yahoo! for example, led the way in web search technology only to be replaced by Alphabet's Google service. That could easily happen in AI, too.
But there is one thing that is very clear about AI. It has to live somewhere and wherever it lives needs a lot of power. The "somewhere" in this situation is, broadly speaking, data centers. And there are some interesting expectations about data centers and electricity demand that could change your view of the utility sector. Without getting into too much detail, U.S. electricity demand from data centers is expected to increase by 300% over roughly a decade.
AI means you now have to reconsider your view of utilities
AI isn't the only trend benefiting electricity demand, noting that electric vehicles are expected to be an even bigger long-term demand driver. But the big picture is that AI is going to be a key part of taking electricity from 21% of final energy use in the United States to 32% by 2050.
This is a step change in the growth outlook for the utility sector, noting that between 2000 and 2020 electricity demand increased 9%. Not 9% a year, 9% in total. It was a boring business that was most likely of interest only to dividend-focused investors, given the penchant of utilities to pay reliable dividends. But demand is now expected to jump by 55% between 2020 and 2040.
So, with AI leading the way, the utility sector's growth appears likely to pick up. While dividend investors will still appreciate utility stocks, the sector may also start to attract those with more of a growth bias. This really upends a historical norm on Wall Street, since utilities were once considered so boring and safe that "widows and orphans" could buy them. A little more caution might be in order now, and a little more enthusiasm.
There are different ways to go about investing in the utility sector. The easy approach is to punt and buy an index product like Vanguard Utilities ETF (VPU -1.07%). It owns over 65 utilities, with most offering at least some exposure to electricity, and has a very low 0.09% expense ratio. If you don't want to pick stocks, this is a great option that lets you play the changes that electricity hungry technology will lead to in this vital picks-and-shovels business.
But you could also dig in and pick some stocks. For example, Dominion Energy (D -2.76%) has a monopoly supplying power to one of the most important data center markets in the world. That monopoly is part of the regulated utility model and is simply a function of Dominion operating in Virginia. Then there's NextEra Energy (NEE -1.22%), which operates regulated utilities in Florida but also has a very large contract-based renewable power business. Clean energy is increasingly being favored as a source of power for high-tech companies and, thus, NextEra Energy is also positioned well to supply AI businesses that need juice.
Time to rethink the "boring" utility sector
The AI revolution demands that you reconsider your investment assumptions. And one area that needs a rethink is the utility sector. It will likely always provide reliable income to dividend investors, but going forward it may be more of a growth and income business than it has been in the past. And that means that more investors may want to add some exposure to utilities, with a broad based play like Vanguard Utilities ETF, or with single stocks like well-located Dominion, or with a clean energy player like NextEra Energy.
