Four Technology Dividend Investments to Buy, Despite Regulatory Lens on AI
By: Paul Dykewicz,
Four technology dividend investments to buy stand out despite President Biden’s Oct. 30 executive order aimed at regulating the use of artificial intelligence (AI).
Even though the four technology income investments to buy rebounded in the first part of 2023 after the sector slid more than 30% in 2022, they subsequently pulled back along with the market but seem poised to rise again. Investors need to be prepared to withstand headwinds of higher-for-longer interest rates, runaway federal deficits and rising political risk with Russia’s unrelenting war in Ukraine amid escalating attacks in the Middle East following a murderous Oct. 7 rampage by Hamas inside Israel that killed more than 1,300 people.
I cautioned in a column earlier this year that governments may start to regulate artificial intelligence and affect the independence of companies to pursue the plans of their choice. President Biden did not wait even six months before issuing an executive order on Oct. 30 to usher in federal oversight of the AI technology advances.
“To realize the promise of AI and avoid the risks, we need to govern this technology,” President Biden said during his Oct. 30 press briefing.
Four Technology Dividend Investments to Buy: Rationale for Executive Order
The president described the executive order he signed as the “most significant action” any government in the world has ever taken on AI safety, security and trust. The order builds on previous steps to ensure an “AI Bill of Rights” by bringing together companies that voluntarily pledged to make sure the technology is safe and secure, he added.
“I am invoking what’s called the Defense Production Act that federal government uses in the most urgent of moments, like mobilizing the nation during… a time of war or developing COVID vaccines during the pandemic,” President Biden said. “This executive order will use the same authority to make companies prove that their most powerful systems are safe before allowing them to be used.”
That means companies must inform the government about the large-scale AI systems they’re developing and share rigorous independent test results to prove they pose no national security or safety risk to the American people, President Biden said. At the same time, President Biden said he would direct the Department of Energy to ensure AI systems don’t pose chemical, biological, or nuclear risks.
In the wrong hands, AI can make it easier for hackers to “exploit vulnerabilities” in the software that makes society run, President Biden said.
For that reason, President Biden said he was directing the Department of Defense and the Department of Homeland Security to develop “game-changing cyber protections” that will make computers and critical infrastructure more secure than they are today. As part of that response, President Biden said his administration would take “decisive steps” to prevent the use of cutting-edge AI chips to undermine U.S. national security, he added.
Four Technology Dividend Investments to Buy: XLK
The first of the four technology income investments to buy that are aided by artificial intelligence is Technology Select Sector SPDR Fund (NYSE: XLK), offering a current dividend yield of 0.78%. Featured in the Forecasts & Strategies investment newsletter led by Mark Skousen, PhD, XLK had jumped 33.04% in 2023 through June 8. The fund’s share price has been choppy since then but still has managed a total return of 37.50% through the close of trading Nov. 2.
Chart Courtesy of www.stockcharts.com
Investors who do not mind some volatility may want to tap these technology equities in pursuit of profits.
Technology entrepreneur Elon Musk, the owner and CEO of Twitter, Inc. (NYSE: TWTR), CEO of Tesla Inc. (NASDAQ: TSLA) and founder and CEO of privately held SpaceX, said on a recent podcast with presidential candidate Robert F. Kennedy Jr. that China is planning to initiate the regulation of artificial intelligence.
Skousen, a strong supporter of XLK, serves as a Presidential Fellow at Chapman University, as well as the head the Forecasts & Strategies investment newsletter. Skousen, a descendant of founding father, diplomat and inventor Benjamin Franklin, also is a seasoned stock market forecaster.
Mark Skousen, head of Five Star Trader and scion of Ben Franklin, talks to Paul Dykewicz.
In a presentation Skousen gave last Sunday, Oct. 29, at the MoneyShow in Orlando, he spoke about “The Fed Disaster Plan.” Skousen told attendees how the Federal Reserve has aggressively raised interest rates and created an inverted yield curve. The U.S. central bank leaders have raised rates faster than any other time in the past 30 years, taking its toll on Wall Street, Skousen added.
“When you can get a 5.4% return on safe money market funds or government securities, it’s hard to stay invested in risky growth stocks,” Skousen opined.
So far, the economy has resisted recession; the federal government announced last week that real GDP in the third quarter rose 4.9%, due to strong consumer and government spending. But business continues to slump, which is the real key to the growing possibility of an all-out recession in 2024, an election year, Skousen counseled.
Four Technology Dividend Investments to Buy: Sell-off Reduces Share Price
Given that the stock market has suffered its worst two weeks of the year, falling into correction territory, those looking to purchase shares of good stocks now can do so at reduced prices. Last week, the S&P 500 fell 2.5%. Despite a strong start to 2023, that index now is up just 8.5% through the first 10 months of the year, seasoned stock picker Jim Woods wrote in the just-completed November edition of his monthly Intelligence Report investment newsletter.
Paul Dykewicz meets with Jim Woods, head of Intelligence Report.
Since August, investors have reduced their interest in technology, Woods wrote. The S&P 500 recently fell to fresh five-month lows as earnings lagged, with many companies falling short of projected earnings per share (EPS), revenue or margins, he added.
“The selling was disproportionately centered on the tech names, and it’s fair to say that tech weakness and earnings disappointment has been the main driver of the declines in the S&P 500 in the final weeks of October,” Woods told his Intelligence Report subscribers.
While earnings season has been somewhat disappointing, it hasn’t been outright bad, Woods wrote. He described it as an expectation problem.
“Tech companies are not producing the kinds of growth that was assumed when the AI craze hit markets in May,” Woods explained. “As such, we are seeing those AI-driven gains given back.”
AI mania is not the sole reason for the 2023 gains, since falling inflation and resilient growth have contributed, too, Woods wrote. But the AI-driven rise in stocks during May and early June was based on very aggressive growth assumptions, so disappointment in that space is now another headwind for markets to face, he added.
Four Technology Dividend Investments to Buy: TDIV
A broad technology fund that also offers a dividend yield and some exposure to artificial intelligence is First Trust NASDAQ Technology Dividend Index (TDIV). The ETF seeks to track the Nasdaq Technology Dividend Index, which is composed of technology and telecommunications companies, said Bob Carlson, a pension fund chairman who heads the Retirement Watch investment newsletter.
Bob Carlson, head of Retirement Watch, gives an interview to Paul Dykewicz.
TDIV recently had 84 holdings, and its 10 largest positions accounted for 53.7% of its assets. The biggest weightings recently were Microsoft (NASDAQ:MSFT), IBM (NYSE: IBM) and Broadcom (NASDAQ: AGVO). The stock currently offers a 1.93% dividend yield.
Chart Courtesy of www.stockcharts.com
The fund with $1.9 billion in assets has produced a total return of 19.87% through Nov. 2 this year. It also offers a current dividend yield of 2.1%.
Four Technology Dividend Investments to Buy: Microsoft
Microsoft Corporation (NASDAQ: MSFT) is the “clear early winner” in the AI software development and deployment race, said Cody Gunn, president of Gunn Capital Management, LLC, of Pateros, Washington. Gunn, who was among 250 people attending the COCM Technology Summit 2023 in Seattle, Nov. 1-3, told me a key growth opportunity is the rollout of Microsoft Copilot, a new capability offered by the company to combine the power of large language models (LLMs) with an organization’s data – all in the flow of work – to turn one’s words into productivity tool.
Microsoft announced on Nov. 1 that it would offer Microsoft Copilot across its entire software stack for enterprise customers to enhance the productivity of employees in using Word, Excel, Teams and other capabilities. Microsoft’s chief executive officer Satya Nadella said on the company’s most recent earnings call that 40 of the Fortune 100 already have Copilot and are implementing it into their current operations.
In addition, Microsoft is a significant investor in ChatGPT and will no doubt be able to monetize that stake in the future, Gunn told me. When Microsoft’s recent purchase of Activision is factored into the organization’s already strong gaming segment, it presents investors with a company that is drastically transformed from the “old” windows operating behemoth, Gunn added.
“All of this leads to a company growing revenues in the low to mid-teens,” Gunn said. “You also get paid to wait in this name as it yields about 1%.”
Cody Gunn, president of Gunn Capital Management, LLC
In addition, Microsoft further enhances shareholder value by buying back meaningful amounts of shares. The company has repurchased $28 billion worth of its stock in the last year alone. MSFT also has zoomed 46.09% this year through Nov. 2.
Chart Courtesy of www.stockcharts.com
Microsoft Rolls out Technology Copilots
Microsoft has three strong advantages as a company that should continue to drive its stock higher: enterprise thought leadership in AI, a robust cloud platform and increasingly intelligent application Copilots, said Matt McIlwain, managing director at Madrona, a Seattle-based venture capital company. Those Copilots, also facilitating Microsoft 365, GitHub and dynamics, will generate revenue upside in the quarters ahead, added McIlwian, who spoke to me while attending the 2023 COSM.Tech conference.
Matt McIlwain is managing director at Madrona, a venture capital firm.
Microsoft is a BofA Global Securities buy recommendation with a $415 per share price objective. It offers a current dividend yield of 0.9%
Four Technology Dividend Investments to Buy: NAPCO Security Technologies
NAPCO Security Technologies (NASDAQ: NSSC) is an Amityville, New York-based manufacturer of security products that offer advanced technologies for intrusion, fire, video, wireless, access control and door-locking systems. The company’s products are sold and installed by tens of thousands of security professionals worldwide to serve commercial, industrial, institutional, residential and government applications.
In addition, the company has a heritage of developing innovative technology and reliable security solutions for the professional security community, including StarLink Universal Wireless Intrusion & Commercial Fire Communicators and new StarLink Connect Radios with Universal Full Up/Download for major brands. NAPCO Security also offers Gemini Security & Fire Systems and the NAPCO Commercial Platform of 24V Addressable/Conventional/Wireless Systems and Firewolf Fire Panels & Devices.
Investors who like to buy stocks when their shares sell off due to bad news may want to purchase NSSC after its price plunged to half of its previous value, following its previously announced need to restate results for its first, second and third fiscal 2023 quarters.
“Fiscal 2023 concluded with record fourth quarter sales of $44.7 million, which was the 11th consecutive quarter of record year-over-year sales,” said Richard Soloway, its chairman and president.
The company’s fourth-quarter 2023 net income of $10.6 million is the largest in its history, Soloway said. Even though equipment revenues declined 6% for the fourth quarter, its locking product sales rose 25% compared to last year’s fourth quarter, he added.
Fiscal first quarter 2024 results, for the three-month period ended Sept. 30, are scheduled to be released on Monday, Nov. 6, prior to the market’s open. NAPCO is down 31.94% so far this year through Nov. 2.
Chart Courtesy of www.stockcharts.com
When the Federal Reserve stops ratcheting up interest rates, expect strong growth stories to profit, said Michell Connell, who heads the Dallas-based Portia Capital Management. The company’s five-year revenue growth has been 10.45% per year and its five-year earnings growth rate has averaged 28% or more annually, Connell added.
“EPS growth rate is expected to increase exponentially more than 100% this year,” Connell commented. “That’s well ahead of the industry average expected growth rate of 22%.”
NAPCO is a “strong cash generator” and initiated a dividend when it reported results on May 8. Connell told me. While the dividend yield for NSSC is just 1.7%, it is a start, Connell counseled.
Michelle Connell, head of Portia Capital Management
Four Technology Dividend Investments to Buy: Risk of Regulation
The Biden administration’s regulatory reach into artificial intelligence innovation drew concerned comments from Richard Vigilante, a senior analyst of Gilder’s Technology Report, a monthly investment newsletter featuring technology futurist George Gilder. Subscribers of Gilder’s Technology Report are kept abreast of what Gilder and his senior analysts describe as top AI stocks with the monthly newsletter and weekly updates.
“What strikes me most is the breadth and generality of the order and the lack of evidence that the government knows what it is doing,” Vigilante opined. “What it says is sufficiently predictable that it could be a Chat GPT document, which does not encourage confidence in the analysis behind the order.”
Particularly mischievous are the non-discrimination provisions, Vigilante cautioned. As often is the case with the Biden administration, “disparate outcomes” are interpreted as evidence of discrimination, leading to an outbreak of lawsuits, he added.
Also scary is that AI could be a great tool for screening out potential frauds, bad actors, destructive tenants and more, but not if users are threatened with criminal prosecution for protecting themselves, Vigilante warned.
Similarly worrisome is mention of sentencing, parole and probation. AI could introduce some objectivity into these murky areas, but the likelihood of disparate outcomes could derail that effort, Vigilante counseled.
Four Technology Dividend Investments to Buy: Rising Political Risk
Russia’s ongoing invasion of Ukraine remains a huge risk, as well as the outbreak of war in the Middle East following the brutal sneak attack of Hamas inside Israel. To help fund its sustained invasion of Ukraine, Russia has committed to limiting production of oil to keep prices up, but it appears to have eased those constraints lately. OPEC leader Saudi Arabia seems to be holding firm with caps on its production to help reduce global oil inventories.
Political risk may creep up further due to the Russian Defense Ministry release of documents recently showing its military spending could rise by more than 68% in 2024 to reach $111.15 billion. That amounts to about 6% of Russia’s gross domestic product (GDP), more than the country’s spending on social programs, according to Moscow Times. Russia’s military spending is set to total about three times more than education, environmental protection and health care spending combined.
The four technology dividend investments to buy can be obtained at reduced prices after their recent pullbacks. However, investors need to be willing to accept rising political risk as wars in Europe and the Middle East rage.
Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.