A Broader Market, a Stronger Case for Dividend Growth

While futurists predict AI will ultimately be deflationary—as Large Language Models (LLMs) unleash human productivity and autonomous agents replace many laborious tasks at a fraction the cost—so far AI is stoking inflation. Data centers’ insatiable demand for computer chips, particularly memory, has driven soaring input costs throughout the economy (Exhibit 2). Apple recently announced a roughly 18% increase across its MacBook line to offset its rising input costs.¹

The inflationary inputs from the AI buildout go beyond the prices of semiconductors: the staggering sums of capital required to fund the data center buildout are weighing on the bond markets. Investor fatigue for data center financing can be seen in the bond prices of hyperscalers. While these companies sport some of the highest credit ratings in corporate America, their bonds trade wider than those ratings would predict (Exhibit 3).

Not long ago, markets expected interest rates to ease. Now, however, persistent inflation combined with a hawkish repricing of Fed policy makes it more likely they will rise. With AI’s boom now reverberating throughout large swaths of both equity and fixed income markets, we see many compelling opportunities in high-quality companies operating outside of technology. These stocks could offer income, downside risk mitigation and growth, and they act as an inflation hedge—making them the perfect port for today’s choppier seas.

In some cases, AI enthusiasm (hysteria?) has created opportunities by sparking selloffs in stocks perceived to face existential risk from AI. Automatic Data Processing (ADP), the leading payroll company in the United States, uses software to process payrolls, and fell sharply with software stocks earlier in 2026. But ADP has been around since 1949, long before software was a thing. Given the low cost of ADP’s services, its importance to companies and employees, and the fact that it moves huge sums of money directly from corporate treasury departments every two weeks, we believe it is low on the list of businesses CIOs would like to replace with AI.

With AI momentum waning, interest rates rising and most investors over-exposed to technology stocks, we believe now is the perfect time to increase exposure to a diversified portfolio of high-quality dividend growers. These stocks deliver attractive current income, provide an offset to inflation, and offer continued upside participation while reducing risk and providing a measure of downside risk mitigation. Indeed, with so many investors and market watchers so focused on the shiny object that is AI, diversified dividend growers are the most attractive they have been since the Global Financial Crisis, in our opinion.

Endnotes

1. Source: Reuters, “Apple raises prices of MacBooks, iPads as memory costs skyrocket”. June 26, 2026.

DEFINITIONS

Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.

The S&P 500® Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the United States.

The S&P 500® Momentum Index is designed to measure the performance of securities in the S&P 500 universe that exhibit persistence in their relative performance.

The Russell 1000 Index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded US companies in the Russell 3000 Index.

The ICE BofA 7-10 Years Index measures the performance of US dollar-denominated, investment-grade corporate bonds with remaining maturities between 7 and 10 years.

Large Language Models (LLMs) are advanced artificial intelligence systems designed to understand, process, and generate human-like text. They form the underlying technology powering modern AI assistants like ChatGPT, Claude, Gemini, and DeepSeek.

DRAM stands for Dynamic Random-Access Memory, which is a common type of computer memory that holds data temporarily while your device is turned on.

A hyperscaler is a massive technology company that provides cloud computing services on an unprecedented, global scale, operating millions of servers across vast networks of data centers.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Important Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.

You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.

Read more commentaries by ClearBridge Advisors