Companies are pouring billions of dollars into artificial intelligence (AI). They're buying powerful processors developed byNvidia and other chip companies to train AI applications. These AI training models and the applications to follow will reside in data centers. Because of that, these already power-hungry facilities will require even more electricity in the future.
Few companies are in a better position to supply the power needs of AI in the U.S. than Dominion Energy(NYSE: D). The utility distributes electricity to Northern Virginia, which is a hotbed for data center development. That strategic location could help power strong growth for the company in the coming years. On top of that, investors stand to collect its lucrative dividend (yielding around 5% at recent prices). That combination of income and growth could give Dominion the fuel to produce attractive total returns in the coming years.
Plugged into the perfect location
Dominion distributes electricity and natural gas to over 4.5 million customers across 13 states. Virginia is a core service area for the company. Dominion Energy Virginia provides power to 2.8 million customers across that state and into North Carolina.
And Northern Virginia happens to have the largestdata center market in the world:
Image source: Dominion Energy.
Several factors have enabled Northern Virginia to become a hotbed of data center development. It has densely packed fiber-optic cable backbones and access to four subsea fiber cables. The state boasts affordable energy (data center electricity costs are 30% lower than the country's average) and an attractive business climate (the state offers tax subsidies and a fast-track approval process for data centers). It's also close to major population centers and water (with the latter crucial to these facilities).
Traditional data centers are already power-hungry facilities. They use 10 to 50 times the energy per floor space of a typical office building. Because of that, these buildings alone currently consume 2% of the country's power each year. Meanwhile, AI data centers use even more energy due to the powerful chips needed to train and run those applications.
Companies will build significantly more data center capacity over the coming years, which should drive meaningful growth in electricity demand. Given its presence in the top data center market, this trend should benefit Dominion over the coming years.
Investing to cash in on rising power demand
Dominion currently expects to invest $43 billion over the next five years to maintain and expand its infrastructure. The company's capital projects include electric distribution and transmission expansions, solar energy, nuclear, offshore wind, and other investments. The utility is investing heavily in offshore wind to help meet the projection that Virginia's electricity demand will double over the next 13 years, partly powered by data centers. Dominion is building the Coastal Virginia Offshore Wind project, a 2.6-gigawatt offshore wind energy project it expects to compete in 2026. In addition, the company recently spent $160 million to buy a 40,000-acre offshore wind lease from Avangrid, which could support up to 800 megawatts of wind energy in the 2030s.
Dominion expects investments like its offshore wind projects to help power 5% to 7% annual operating earnings-per-share growth over the coming years. That's a very solid growth rate for a low-risk utility. And the company's growing earnings will support its high-yielding dividend.
Dominion's current payout ratio is 97%, which means almost all its operating earnings are going toward its dividend payments. Normally that would be a sign of trouble. But Dominion plans to maintain its current dividend level until rising earnings bring its payout ratio down to its target in the 60% range. As a result, the company's dividend income will become more sustainable in the near term and should grow over the long term.
Powerful total return potential
Dominion offers investors a compelling way to cash in on AI-driven power demand. The utility pays a 5%-yielding dividend that will become increasingly sustainable as it grows its earnings by 5% to 7% annually over the next several years. That combination of sustainable income and earnings growth should give Dominion the power to produce total annual returns in the 10% to 12% range, assuming no change in its valuation, with additional upside if its valuation rises. That's an attractive return from such a low-risk stock, making Dominion an enticing way to cash in on the AI boom.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
