How To Tap The AI Nuclear Bonanza For 10%+ Dividends

Forbes

2 days ago

The AI boom still has plenty of room to run—but investing purely in AI stocks is not the best way to tap into it.
NVIDIA (NVDA) and friends yield next to nothing! And these are crowded trades.
Luckily for us, there's another way to get in. Bargains are still available in the corner of the market we'll get into below—as are 10%+ dividends. It's all tied into AI's voracious appetite for electricity. Yes, utilities are part of this play, but we want to go a little bit deeper and zero in on stocks specifically tied into nuclear power.
We're going to tap into those through high-yield closed-end funds (CEFs) that both trade at discounts and send huge payouts our way, too.
Let me explain.
It's been about a month since the Wall Street Journal reported on President Trump's plans to expand nuclear power in the US. The story went mostly unnoticed, but it's an important one because it's a multi-year plan that has bipartisan—and indeed non-political—support.
For a couple of years now, tech companies have been pushing for more nuclear power. Alphabet (GOOGL) has been investing billions into nuclear-power companies such as Kairos Power and Elementl Power, while Amazon poured $500 million into X-Energy to build up nuclear capacity.
AI, and its near-bottomless power demand, are behind these moves. And since AI is now transforming the American workplace and boosting productivity, the debate over whether this tech is a flash in the pan or here to stay is settled: It's here to stay.
Back in September 2020 (i.e., long before ChatGPT was released), I wrote in my CEF Insider advisory that one needs to invest widely to benefit from the technology, since it can produce efficiencies in circuitous ways: 'Some companies, like insurance firms, will profit from artificial intelligence as this technology improves underwriting, lowers risk and improves health outcomes for patients.'
The growing attention that nuclear power is getting is a prime example of this circuitous, second- and third-order benefit from AI playing out. Since AI is power-hungry, electricity and infrastructure suppliers serving the growing nuclear-power business will benefit.
Sounds Great, But How Do We Profit From The AI Nuclear Growth?
You might be thinking, 'Okay, but how do I actually ride this wave?'
Well, as I mentioned off the top, we need to look further afield than the NVIDIAs of the world to capture these higher-order effects of AI. That's where utilities come in:
Higher energy demand is a clear win for utilities, yet in the three years since ChatGPT and its range of copycats have been released, the utilities sector, shown in orange above by the performance of the benchmark Utilities Select Sector SPDR Fund (XLU), has returned just 25%, less than half the broader market.
That tells us the sector as a whole is still undervalued. And it also means buying XLU is still on the table as a way to capture the growing power (and specifically nuclear-power) demand AI is creating.
But XLU isn't the only play, and it's hardly the best. As an index fund, it gets us broad exposure to the utilities sector, but broad isn't what we want with something like AI, which is being brought in unevenly throughout the country. We want something a bit more tactical to target where the demand is hottest.
A more active approach, like that of a CEF called the Gabelli Utility Trust (GUT), fits the bill here. The fund holds firms like WEC Energy (WEC), which is looking at expanding nuclear power production in Wisconsin, and Constellation Energy (CEG), owner of the largest collection of nuclear plants in the US. Plus, with its 10.7% yield, GUT is a much better income provider than 2.8%-yielding XLU.
Plus, over the long haul, GUT (in orange above) has closely tracked XLU's total returns, so we're not sacrificing performance for income here.
However, there are two snags with this fund. First, if GUT is just tracking the index, it isn't outperforming and thus we can't expect it to be tactical enough to benefit from the AI boom more than an index fund would. Plus, the fund is far from a bargain.
GUT currently trades at a 96.2% premium to NAV. That's the second-highest premium in the CEF world, and it means investors are paying nearly $2 for every $1 of assets!
And, as we saw last year, that premium can disappear fast, causing big losses in the short term, as well. So, while GUT has done a good job transforming utilities' profits into income, its premium and its historical performance suggest it isn't the way to go for us.
So instead, let's look at another CEF, the 10.1%-yielding Voya Infrastructure Industrials and Materials Fund (IDE), which trades at a 4% discount to NAV. As the name says, the fund holds key infrastructure suppliers like Siemens AG, Cisco Systems (CSCO) and Schneider Electric SE, all of which stand to gain from an AI-driven infrastructure buildout, including on the nuclear front.
Not only is IDE a lot cheaper than GUT, it's also outperformed it on a total-NAV-return basis (based on its underlying portfolio, not its sentiment-driven market price) over the last three years.
With a slightly higher total NAV return, IDE's management has proven they know where to put money to get returns, and the fund's lower volatility is attractive, too. Without big swings in its asset value, like GUT saw in 2023, IDE hasn't had to sell assets at a loss to maintain its payouts.
Additionally, the fact that IDE has beaten GUT over the last three years on a total-NAV-return basis, suggests it is being more tactical and benefiting more from the AI boom. That makes it more than worth your attention as a place to invest as nuclear demand rises in the long term.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report 'Indestructible Income: 5 Bargain Funds with Steady 10% Dividends.'
Disclosure: none