Investors often get an idea in their heads and run with it, pushing prices to extremes that aren’t realistic. That’s the risk that investors should fear today with artificial intelligence. Nvidia (NVDA 0.28%) is pretty much the poster child of the AI industry, with Wall Street hanging on every word the management says. But it won’t be a good AI choice for every investor. Here’s why you may prefer high-yield Dominion Energy (D -0.27%) instead.
Everybody wants in on the AI revolution
Artificial intelligence is impressive in many ways, and it has been developing very quickly, as well. Just about every major corporation has started to use, or at least experiment with, the technology. There probably isn’t a day that goes by that AI isn’t given space in a financial newspaper, website, or television channel. It is one of those big-picture trends that has captivated Wall Street.
Image source: Getty Images.
There are good reasons for that, but it still isn’t clear just how impactful the technology will be in the long run. And, equally important, it isn’t clear what companies will end up being the big winners or the big losers. Today, chipmaker Nvidia is a clear leader, making what amounts to the “brains” of AI. And shockingly, Nvidia’s valuation doesn’t seem overly extreme right now, with its price-to-sales and price-to-earnings ratios both currently below their five-year averages.
That said, Nvidia’s 39x P/E ratio is above the technology sector’s average of around 33x. So it wouldn’t be fair to call the stock cheap, either. And don’t forget that the early leaders in an industry don’t always remain the leaders. Just look at Yahoo!, which was once the go-to search engine but eventually got replaced by Alphabet’s Google search tool.
In other words, investing in Nvidia today may seem like a good idea, but it still comes with some risks. There’s another option when it comes to AI, and that’s buying a regulated electric utility like Dominion Energy.
Why choose Dominion over Nvidia?
If you want to invest directly in AI, Nvidia will be a better option than Dominion. But there’s an important overlap here because AI can’t exist without electricity. In fact, data center demand for power is expected to expand by 300% over the next 10 years to satisfy the AI industry’s growth. That is going to require material capital investment in the power grid and, in turn, lead to growth for utilities.
Dominion is an interesting stock in this regard. For starters, it has gone through a corporate repositioning that has resulted in it now being a pure-play regulated electric utility. However, along the way, the dividend was cut and the current rate is likely to stay the same for a few years while the company brings its dividend payout ratio back down toward the industry average. The stock is out of favor, offering a dividend yield of 4.9% versus the utility average of 2.9% and Nvidia’s itty bitty 0.05% or so.
If you are a dividend investor you will clearly find Dominion more attractive than Nvidia. But there’s an interesting wrinkle here. Dominion has a monopoly in one of the largest data center markets on the planet. To highlight that, it witnessed 88% growth in demand from data centers between July 2024 and December 2024. This is a core pillar behind the utility’s long-term projection of 5% to 7% earnings growth.
That’s a good number for a utility, and if management can achieve that goal Wall Street will eventually afford Dominion a higher valuation. That kind of growth will also lead to an eventual resumption of dividend growth, which will also be viewed favorably by investors. In other words, Dominion is something of a low-risk turnaround story with an AI twist. For long-term dividend investors that will probably be a much more attractive opportunity than buying Nvidia and hoping that it remains in the pole position in AI indefinitely.
Step back and consider you AI options
To be fair, Dominion isn’t the only electricity play in the AI sector. There are other utilities that will benefit and some new technology upstarts, too. For example Bloom Energy offers power cells that can be deployed more quickly than power lines can be built. And NuScale Power is attempting to build a business around small scale nuclear reactors that could be placed right next to AI data centers. But the combination of risk and reward, notably including the stock’s lofty dividend yield, Dominion offers is hard to ignore if you want to invest in AI but can’t quite stomach owning a volatile technology stock.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has positions in Dominion Energy. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Dominion Energy and NuScale Power. The Motley Fool has a disclosure policy.