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Want To Cash In On The Ai Boom In 2025? Check Out This Electrifying Etf.
AI is an electrifying technology. It can significantly reduce the time needed to perform a whole host of tasks, which has the potential to significantly boost productivity. That's leading companies to pour trillions of dollars into the semiconductor chips needed to power this technology.
Those chips require a tremendous amount of electricity. For example, ChatGPT needs almost 10 times the power to process a query as the average Google search. With AI's usage accelerating, it could power a more than 160% surge in electricity demand in the U.S. by 2030 from data centers used to power AI applications, according to an estimate by investment bank Goldman Sachs.
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This power surge should benefit utility stocks. A great way to potentially cash in on this megatrend is to buy shares of the Vanguard Utilities ETF (NYSEMKT: VPU). The exchange-traded fund (ETF) holds many of the top utilities that are benefiting from AI-powered electricity demand. Its value has already risen 37% this year, and it could have the fuel to continue surging in 2025.
Generating income
Vanguard Utilities ETF aims to measure the return of stocks in the utilities sector. It holds companies that distribute electricity, water, and natural gas, as well as those that operate power plants. The fund currently holds 70 utilities.
Its top five holdings are:
- NextEra Energy (NYSE: NEE): 11.7% of the fund.
- Southern Company: 6.8%.
- Duke Energy: 6.5%.
- Constellation Energy (NASDAQ: CEG): 5.8%.
- Sempra Energy (4.3%).
One notable factor about utilities is that they generate very predictable and stable earnings. That's because electricity demand tends to be very steady, and these companies operate monopoly-like businesses with rates set by government regulators.
That stable cash flow allows these companies to pay above-average dividends. The ETF currently yields around 2.8%, which is more than double the S&P 500's dividend yield (around 1.2%). That dividend provides investors with a nice income stream. For example, every $1,000 invested into this ETF would generate about $28 in passive dividend income each year.
AI-powered growth
That income stream is only part of the draw of this ETF. Many of its top holdings expect the AI power surge to fuel tremendous growth over the next few years.
For example, NextEra Energy is a leader in developing renewable energy. The company expects demand for renewables to surge in the coming years. CEO John Ketchum stated on its third-quarter earnings conference call that:
U.S. data center power demand alone is expected to increase substantially, adding approximately 460 terawatt hours of new electricity demand at a compound annual growth rate of 22% from 2023 to 2030, which could potentially enable 150 gigawatts (GW) of new renewables and storage demand over the same period.
This catalyst is one factor driving its view that it will more than double its renewables and storage capacity by 2027 (from 38 GW to 81 GW). That drives its confidence that it can grow its adjusted earnings per share (EPS) at or near the upper end of its 6% to 8% annual target range through 2027. Meanwhile, it expects to deliver dividend growth of around 10% annually through at least 2026, adding to its already attractive 2.8% current yield.
Constellation Energy is a leader in producing nuclear power. Earlier this year, the company signed a deal with Microsoft to restart its Three Mile Island Unit 1 generating unit, which it shut down in 2019 for economic reasons. Microsoft agreed to buy 100% of the power the unit will produce (837 megawatts) when it starts back up in 2028 to help power its cloud and AI operations. The technology company is reportedly paying more than double the current market price for this emissions-free electricity.
That deal adds to the already powerful growth Constellation Energy sees ahead over the next several years. The power producer expects to grow its EPS by more than 10% annually through 2028. That should give it the fuel to increase its dividend (0.6% current yield) by around a 10% annual rate in the future.
Powerful total return potential
Utility stocks generate stable cash flow, which allows them to pay attractive dividends. That enables investors to literally cash in on the AI boom by generating some passive income. On top of that, these companies have robust growth ahead as the technology accelerates power demand. Add that growth to their income streams, and utility stocks could produce powerful total returns in the future. That compelling combination makes the Vanguard Utilities ETF a great option for those seeking exposure to this high-powered megatrend in 2025.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Matt DiLallo has positions in Alphabet and NextEra Energy. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, Microsoft, and NextEra Energy. The Motley Fool recommends Constellation Energy and Duke Energy and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
