Portfolio growth is the goal of the vast majority of stock investors. Bond investors are usually more interested in principal protection with some interest income. However, the lines have blurred over the last decade or so. Other opportunities have arisen, thanks to the introduction of fractional share purchases, the proliferation of ETFs, and high dividend stocks that are also in the S&P 500. 

At the time of this writing, AI stocks are the hottest ticket high-flying equity sector, with Nvidia (NASDAQ: NVDA) probably the most high-profile company of the lot, going up 1,986% over the last 5 years.  All of the Magnificent 7 stocks have an AI component, and it is revolutionizing how people use digital technology, as its interactivity allows for creative new applications daily. 

At the same time, dividend stocks have started gaining fans outside of their traditional demographic. Retirees and middle class small investors looking for safe, recognizable brand name companies that pay a dividend and exhibit modest growth for buy and hold strategies are still a majority, roughly 60-65%. Institutions, like ETFs and hedge funds, have now added dividend stocks to their holdings, and a burgeoning younger generation of individual investors has now entered the waters.

Risk Comes In Multiple Forms

The notion of investment risk boils down to potential financial loss, or the perceived threat of loss. The level of comfort that an investor has, emotionally, for a prospective investment is categorized as “risk tolerance”, and it is a key component of the Know Your Customer (KYC) Rule for financial professionals. 

The following subcategories of risk would certainly apply when comparing AI and dividend stocks:

Volatility Risk:  

• The AI sector’s rapid rise over a longer period of time is replete with roller coaster peaks and valleys on a stock chart. Being up 15 points one day and down 12 points the next day is not for the faint of heart. 
• Conversely, the majority of dividend stocks do not exhibit that same level of volatility. This is due to the fact that most stocks that have a solid history of paying dividends are in established businesses. The ability of these companies to pay dividends, usually, but not always, comes out of profits, This is a stark contrast to AI companies, which, while in a very hot sector, are mostly still unprofitable; even such  ubiquitous companies like SoundHound AI. 

Single Sector Risk: 

• Apart from Magnificent 7 stocks, which may have an immunity to this trend, a negative news event that ties to the AI industry as a whole will likely trigger a selloff on a majority of stocks affiliated for the whole sector. 
• Conversely, dividend stocks hail from a wide range of industries. Companies such as tobacco goliath Altria, telecom titan Verizon, and Brazilian national mining company Vale SA all come from different industries, so what happens to one will not happen to another based solely on “guilt by association”.

Institutional Dependence Risk:

• AI is still a new sector with many weekly developments and countless unexplored avenues. Many investors rely on the imprimatur of legitimacy from an established institution or industry leader to validate the viability of an AI company that may still be operating at a loss. Withdrawal of such a vote of confidence, or at least the appearance of it, could trigger a selloff.  Such an event happened to SoundHound (NASDAQ: SOUN) when Nvidia, who owned 1.7 million shares, decided to dump the entirety of the position in Q4 2024. SoundHound fell more than 50% as a result. 
• As dividend stocks come from an expanse of industries and are owned in millions of institutional and individual portfolios the likelihood of a single sell recommendation from an analyst or a hedge fund deciding to sell a company’s stock will trigger mass dumping is very remote. 

Stagnation Risk:

• The AI sector is white hot, and excitement over AI is a primary driver behind the surge of Magnificent 7 stocks. The capabilities of AI are still being discovered, and its potential is limitless. The chances of the sector going stagnate are extremely small. Individual stocks of AI affiliated companies that cease to innovate or grow are the only ones that might possibly be at risk for stagnation.
• Dividend stocks in businesses undergoing industry contraction, such as Altria, are potential stagnation risk victims. While Altria may be able to continue generating profits, its growth prospects are shrinking due to fewer people taking up smoking, and while few alternative uses for tobacco exist. 

Income vs. Capital Appreciation

In addition to gauging one’s own risk tolerance, investment goals and requirements are another completely subjective matter.  If one needs substantial growth and the timeframe is limited, AI stocks have the momentum to deliver that, albeit with considerable risks on a number of fronts. However, not every AI stock delivers 20%+ annual ROI. 

Depending on selection, a portfolio of dividend stocks, if they include certain REITs, can deliver a cumulative annual yield of over 10%, combined with average annual growth of anywhere from 1.5%, like Verizon (NYSE: VZ), to 45%, like Broadcom (NASDAQ: AVGO).

The ETF Route

One way an investor may wish to avail themselves of better diversification is to look into Exchange Traded Funds (ETF), For example, there are several AI based ETFs, such as Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ) or iShares Future AI & Tech ETF (NYSE: ARTY). They offer exposure to the AI sector specifically without the concentrated risks of a single stock, such as what happened to SoundHound AI. 

Dividend oriented ETFs are even more plentiful, with the Vanguard High Dividend Yield ETF (NYSE: VYM) or Capital Group Dividend Value ETF (NYSE: CGDV) being two to consider. 

Mixing and Matching

Unlike the days when shares of stocks sold in fractions of a dollar, the digitization of the markets have led to sales down to the penny, and has thus made fractional shares a reality. For investors inclined to go that route, they can conceivably create a portfolio out of a combination of select stocks and ETFs, which deploy dollar cost averaging.

For example, a portfolio consisting of 60% dividend stocks and REITs that average a yield of 10% while 40% holds AI ETFs could deploy a dollar cost averaging strategy to use dividend proceeds to buy more AI ETFs on a preset basis. This would execute buying when the AI ETFs were both trending upwards or downwards, with the anticipation that the average price over the period would still accumulate the position with a better profit than trying to time the market. 

While this method might not achieve the full growth results of having the entire portfolio in AI, it would also mitigate the volatility and other risks, while having the option of dividend liquidity if needed for emergencies. 

AI is certainly the wave of the future and an exciting growth oriented sector in which to invest. However, it is not the only one out there, and sometimes boring stocks with good dividends can serve an equally  useful place in a portfolio.

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