Skip the AI FOMO, cash in where no one's looking: Bernstein backs old-school payouts and warns AI may be the next dot-com bubble
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Richard Bernstein, Chief Investment Officer at Richard Bernstein Advisors , sees too much heat in the artificial intelligence trade. In a note dated 30 June, he drew a sharp line between today's AI rush and earlier booms that went too far.'Investors seem universally focused on 'AI', which seems eerily similar to the '.com' stocks of the Technology Bubble and the 'tronics' craze of the 1960s,' Bernstein wrote. He added that while AI dominates headlines, 'we see lots of attractive, admittedly boring, dividend-paying themes.'Since OpenAI's ChatGPT appeared in November 2022, the numbers have been hard to ignore. The S&P 500 has gained 54 percent. The Nasdaq 100 has soared 90 percent. Some valuations have pushed back to levels last seen just before the dot-com crash or even the market peak in 1929.This has made investors pile into anything labelled AI. But Bernstein says that might not be smart money at this stage. He made clear he is not calling the exact top. Still, trends do not run forever.'The best time to invest in something is when it's out of favour — not after a massive rally has occurred,' he wrote.Bernstein laid out how investor moods flip as markets change. Early in a bull run, fear rules. People look for dividends and lower-risk bets. Once they feel bold, they chase high growth stories instead.'At the beginning of a bull market when momentum and beta strategies are by definition most rewarded, investors' fears lead them to emphasise dividends and lower-beta equities,' he said. 'In later-cycle periods when dividends and lower beta become more attractive, investors' confidence leads them to risk-taking and momentum investing.'His take? We are no longer early in this cycle. 'We clearly are not at the beginning of a bull market and, as we've previously written, the profits cycle is starting to decelerate,' he wrote.So, where does that leave investors who do not want to get burnt? Bernstein says boring can be smart. He points to dividend stocks, especially in the utilities sector, as ready for a fresh look.These companies pay steady sums to shareholders. Some pocket the money. Many reinvest it back into the stock, which helps their position grow over time.'One of the easiest methods for building wealth has historically been the power of compounding dividends,' Bernstein said. 'Compounding dividends is boring as all get out, but it's been highly successful through time.'People might assume high-flying tech leaves old utility stocks in the dust. Bernstein says that is not quite true.'In fact, compounding dividend income has been so successful, that the Dow Jones Utilities Index's returns have been roughly neck-and-neck with NASDAQ returns since NASDAQ's inception in 1971,' he wrote.Investors do not need to pick single stocks to get in. Funds like the SPDR S&P Dividend ETF and Vanguard Dividend Appreciation ETF spread the bets and deliver a mix of steady pay-outs.Bernstein's message is not about ditching technology altogether. It is about seeing the pattern. Big fads rise fast. They fall just as fast when the shine wears off. While the AI hype carries on, he thinks dividends could quietly do the heavy lifting.The trick, he suggests, is to look where others are not. Sometimes the most boring corner of the market can end up paying the best.
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