TLDR:
- Artificial intelligence (AI) stocks had a strong performance in 2023, with tech giants like Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA Corp., and Tesla leading the way.
- Despite the gains, AI stocks still have room to grow, as estimates suggest AI could contribute trillions to America’s GDP in the future.
- While the S&P 500 remains below its all-time high, the tech sector saw a 75% gain last year, indicating there may still be a buying opportunity.
- Gabelli Equity Trust (GAB) is a closed-end fund (CEF) that offers a high dividend yield of 11.7% and holds S&P 500 mainstays like Mastercard, Deere, and Berkshire Hathaway.
- Investors can consider swapping their holdings of S&P 500 ETFs like SPDR S&P 500 ETF Trust (SPY) for GAB to benefit from the higher dividend income.
I first saw a spaghetti western last year and am still kicking myself for not watching one sooner— A Fistful of Dollars is a masterpiece. I’m reminded of the movie’s title because a fistful of dollars is what a lot of investors got from the so-called “Magnificent Seven”—namely Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA Corp. (NVDA) and Tesla (TSLA) —last year. These tech wonderkids were, of course, on a tear in 2023, jumping 75% on average and providing the bulk of the market’s gain.
The reason for that is pretty clear: artificial intelligence, which burst onto the public consciousness with the release of ChatGPT in November 2022. To be fair, there’s some hype around this technology, but you might be surprised to hear me say that there isn’t a lot . I say that because tech stocks’ gains are still minor when you consider some of the estimates of AI’s potential value to the economy. Research firm McKinsey, for example, recently released a report arguing that generative AI will contribute $2.6 trillion to $4.1 trillion to America’s GDP in the future, although the timeline behind those numbers is a bit vague (and the range is pretty wide, too).
But there’s another reason to believe that AI stocks’ rise in 2023 isn’t overdone and we’ve still got a nice buy window here: the S&P 500 remains below its all-time high despite the surge in the tech sector (even though the benchmark index did rise above all-time highs last week).
And the benchmark index is only barely above the last peak, which was way back in late December/early January 2022. Meantime, the tech sector’s 75% gain last year is amazing, for sure. But if we zoom out to late 2021, the Magnificent Seven are a bit less impressive: NVDA Leads the Magnificent 7 Gains
On average, these stocks are up 8.8% annualized, not much more than tech as a whole. Take NVIDIA out and they’re actually down, on average, due to Tesla’s big drop. And when we consider the 11.6% return from the 493 other S&P 500 companies in 2023 (and those have not recovered from the decline following their all-time highs, by the way), we can see that this market—including tech— isn’t overbought.
The knee-jerk reaction of plenty of folks when hearing this news might be to pick up the all-popular SPDR S&P 500 ETF Trust (SPY) . But we closed-end fund (CEF) investors know a lot better. After all, why would we hold a fund like SPY, and its 1.4% dividend when we could pick up a CEF paying a lot more— more than eight times more , in fact?
Short answer is we wouldn’t—and we don’t. Especially when there’s a CEF option like the Gabelli Equity Trust (GAB) around. GAB is run by well-known value investor Mario Gabelli and holds S&P 500 mainstays like Mastercard (MA), Deere (DE) and Berkshire Hathaway (BRK.A) . That means that if you do hold an index fund like SPY—and there’s no shame in that if you do!—you can essentially “swap” it for GAB and hold many of the same stocks except you’ll get the vast bulk of your return in dividend cash, thanks to that 11.7% yield. SPY holders, meantime, get little solace from that 1.4% payout and need to rely mostly on price gains for their profits. That’s why we prefer CEFs—they can pay us in dividends, gains in NAV and from their closing discounts to net asset value (NAV), which help propel their prices higher. ETF buyers, meanwhile, are pretty much stuck with only price gains to drive their profits. On that note, GAB trades at a 2% discount now, which doesn’t sound like much, until you consider that this fund traded at a 7.9% premium, on average, over the last five years.
Michael Foster is the Lead Research Analyst for Contrarian Outlook.