AI Needs Power: Invest in High-Yield Utility Stocks to Ride the Electricity Demand Wave

During Brookfield Renewable's (NYSE:BEP)(NYSE:BEPC) fourth-quarter 2024 earnings call, the company's CEO stated very clearly that, "Following several decades of modest electricity demand growth, we are experiencing a dramatic shift in demand driven by the AI revolution." That's basically the same sentiment that's being expressed by electricity providers across the board and it highlights an opportunity for investors broadly and income investors specifically.

Who is going to win?

Brookfield's CEO went on to explain that he believes artificial intelligence (AI) is "one of, if not the most, significant advancement in technology in our lifetime." That may very well be true, but history is filled with massive technological advances and the investment lessons aren't great. Very recently there was the advancement of electric vehicles (EV), with Tesla effectively creating an entire new industry.

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There was great excitement at first, with a host of companies attempting to follow Tesla's lead and build EV companies from the ground up. Only many of those companies have now gone bankrupt. The ones that have survived experienced massive stock spikes early on when Wall Street was enamored with the EV story. But many have lost 90% or more of their value as investors realized that not every EV company was going to be a winner.

The same story unfolded with internet stocks at the turn of the century. Yes, some very important companies were created and they are now giants in the industry and in absolute terms, including Alphabet. But don't forget that Google competitor Yahoo! has suffered through material difficulties and it didn't work out very well for investors. And there were many other one-time internet darlings that flamed out entirely.

If history is any guide, it will be very difficult to correctly select the few AI stocks that will end up winners. But there is one thing that every AI winner will need a lot of: electricity.

Plenty of electricity options when it comes to AI investing

Perhaps the safest way to play the AI electricity demand increase is with a regulated electric utility. Regulated utilities are granted monopolies in the areas they serve, so they have a pretty strong head start when it comes to supplying AI's needs. But there are big and small utilities, so there are still different ways to play this angle.

For example, industry giant Dominion Energy (NYSE:D) has seen an 88% increase in interest from data centers for electricity in its Virginia based utility operations since just July 2024. Virginia happens to be an important hub for data centers, which also support AI. Dominion, which has a lofty dividend yield of 4.8%, is working through a business turnaround and its dividend has been static for a couple of years. Spiking electricity demand driven by AI could get the dividend back on the growth track. But you'll be paid very well to wait even if the return to dividend growth takes a little while.

At the other end of the size spectrum is relatively small Black Hills (NYSE:BKH), which expects the earnings contribution from data centers, and AI, to more than double by 2028. At that point this single customer group should account for 10% or more of earnings. Black Hills has a yield of 4.4% but it happens to be a Dividend King, with more than 50 consecutive annual dividend increases under its belt.

Shifting gears a little, you could also look at Brookfield Renewable. This clean energy company owns assets across the renewable power spectrum, including hydroelectric, solar, wind, storage, and nuclear. It also has a globally diversified portfolio. Management expects to benefit from AI demand growth as companies increasingly look for clean power options. Brookfield Renewable's yield is as high as 6.5% for the partnership share class and it isn't limited by geography when it comes to supplying power to AI companies.

And then there's a company like NuScale Power (NYSE:SMR), which is looking to produce small-scale modular nuclear reactors. It hasn't actually sold one yet, but for more aggressive investors its technology is very interesting and perfectly suited to AI. Essentially, a small nuclear reactor could be placed right next to the AI data center that needs the power. It has a speed to market advantage that could make it an attractive partner for AI companies. But, as a start-up, it isn't making money right now and doesn't pay a dividend.

Play it safe or take on a little more risk, electricity demand is key for AI

Clearly, there is a huge spectrum of investment options when it comes to supporting AI with the electricity it needs. The safest way to play this is going to be regulated utilities, but they aren't the only way. Brookfield Renewable provides a clean energy angle and NuScale is a direct way to invest in the nuclear industry in a way that may benefit greatly from AI's demand for electricity. Dividend investor or growth investor, there's likely to be an electricity option that will meet your investment needs around AI here.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has positions in Black Hills, Brookfield Renewable Partners, and Dominion Energy. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool recommends Brookfield Renewable, Brookfield Renewable Partners, Dominion Energy, and NuScale Power. The Motley Fool has a disclosure policy.