A Cheap Fund That Turns AI Hype Into 10% Dividends

Few folks know it, but there’s a way to tap the surging AI trend for a growing 10% dividend. Better still, this monster “AI-powered payout” comes our way monthly.

That’s a far sight better than what most folks are doing these days: focusing on a handful of dividend paying blue chip tech stocks like Microsoft

MSFT
(MSFT).

There’s nothing wrong with Microsoft, of course. But it does yield just 0.8%, or about half what the typical S&P 500 stock pays. It makes up for some of that with a dividend that’s growing like a weed—up just shy of 200% in the last decade—but what if you want a decent yield now?

ADVERTISEMENT

Well, that’s where the savvy 10%-paying AI play we’re going to break down today comes in. Its yield is more more than 12 times what Microsoft pays.

The dividend play in question here is the AllianzGI Artificial Intelligence & Technology Opportunities Fund (AIO), a closed-end fund (CEF) that, as you can see above, has raised its dividend since inception and held it steady through the pandemic. Plus it dropped two special payouts during those dark days.

Then there’s the portfolio, which includes tech mainstays like Microsoft and Apple

AAPL
(AAPL), alongside other key tech firms like Meta Platforms (META), NXP Semiconductors

NXPI
(NXPI), Motorola (MSI) and Oracle

ORCL
(ORCL). All of these firms stand to gain as AI, which is still in its early days, picks up steam.

Better still, thanks to AIO’s high yield, we’re getting a huge dividend from these stocks, many of which pay low (or no) dividends themselves.

And there’s more to this unique fund than tech: in addition to major stocks from that sector, it also holds deep-value stocks in other industries, like AstraZeneca (AZN), Hilton Worldwide Holdings

HLT
(HLT) and Deere & Co. (DE).

ADVERTISEMENT

The result, as you can see below, is that AIO’s underlying portfolio (its net asset value, or NAV, in other words—more on this in a second), shown in orange, outran the S&P 500 when tech soared in 2020 and 2021, while simply matching the index’s return in 2022, a tough year for tech.

That brings me to the next reason why AIO is on our buy list now: its discount to NAV, or the gap between its per-share NAV and its (discounted) market price. You only get these markdowns with CEFs, and they stem from the fact that a CEF, once launched, can’t issue new shares to new investors. This creates a disconnect that results in a different NAV and market price.

And when we buy at a discount, we set ourselves up for some nice additional upside as those markdowns disappear. Right now, AIO trades at a 9% discount—a good deal on its own. But it gets better when you consider the momentum behind that discount!

ADVERTISEMENT

This is when we love to buy CEFs in my CEF Insider service: when a fund’s discount is trending up but is still historically wide.

If the market gets fully bullish on tech again, AIO’s returns will likely eclipse those of the S&P 500, like they did in 2021. The key difference here is that back then, tech was driven by the crypto bubble and the Fed’s easy monetary policy. Those were unsustainable tailwinds, while AI is a real technology that’s producing real gains for many firms—and it’s just getting started.

So why, you might ask, hasn’t AIO’s NAV return already started to outrun that of the broader market in 2023, given the tech-heavy NASDAQ’s
NDAQ
30% year-to-date gains? Part of the reason is that AIO’s discount hasn’t entirely evaporated. But more importantly, despite its recent gain, the NASDAQ still lags the performance of the S&P 500 over the longer term.

In other words, we aren’t really in a bull market for tech, which is up just 12.7% since the start of 2021. This, in turn, means there’s still time for AIO’s price to rise, as its portfolio appreciates and its discount continues to disappear. Those potential gains are in addition to the 10.3% dividend we’ll collect by buying now.

ADVERTISEMENT

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 10.4% Dividends.”

Disclosure: none