Utilities are conservative income stocks with a reputation for being safe enough to be suitable for widows and orphans. This is true for some utilities, but NextEra Energy (NYSE: NO) bucks the trend (in a good way). While NextEra operates a boring utility company, it also owns a fast-growing renewable energy business.
For both growth and income and dividend growth investors, this is a great stock to consider. And now is the unique opportunity to buy it. Here’s what you need to know.
NextEra is down, but not out
NextEra Energy’s dividend yield is about 3.5%. This is basically consistent with average utility using Vanguard Utilities Index ETF as an industry proxy. While income-focused investors may consider NextEra’s yield modest, it’s important to note that the 3.5% yield is near the highest levels in a decade. So in that way, the stock looks historically cheap right now.
However, management expects to increase the dividend by approximately 10% in 2024, which is both attractive in absolute terms and extremely high for a utility company. But that’s right in line with the rate of dividend growth over the past decade. The dividend has increased annually for 29 years, so an increase in 2024 would bring that record to a whopping three decades. NextEra Energy is a dividend growth machine, and there’s no reason to think the growth will stop anytime soon.
Notably, management projects earnings growth of between 6% and 8% annually through 2026. There’s a chance that dividend growth will slow and simply track along with earnings growth, but even that suggests an attractive dividend growth rate . This is especially true for utility stocks.
This is notable because dividend growth investors and growth and income investors looking to build a diversified portfolio will likely struggle to add exposure to utilities. Most stocks in the sector are simply growing slowly in terms of earnings and dividends. NextEra Energy’s historically high yield and solid growth outlook make the stock an ideal diversification choice for investors looking for something with a little more growth.
Why is NextEra’s yield historically high?
The really big reason for NextEra’s high yield is that interest rates have risen. There are two issues investors should consider here. First, other income options are now more competitive, such as certificates of deposit. Second, and more importantly, higher interest rates will make NextEra’s business more expensive to grow. The utilities sector is capital intensive and highly leveraged. Don’t worry too much about it.
There are two different businesses to consider here. First, NextEra owns Florida Power & Light, which is Florida’s largest regulated utility and about 70% of the utility’s business. The Sunshine State has benefited from population growth for years. More clients mean more revenue and more opportunities to invest in regulated assets. It’s a very stable and reliable business because NextEra has been granted a monopoly in exchange for accepting government oversight of the rates it charges and its capital investment plans. Regulators are usually set up so that utilities can earn a reliable return. Thus, it is highly likely that the rates that NextEra may charge will eventually be updated to account for higher interest rates.
The rest of NextEra is NextEra Energy Resources, one of the largest renewable energy producers in the world. It is a fast-growing business with a very long growth track as carbon-rich energy sources are replaced by renewable sources such as solar and wind. NextEra currently operates about 34 gigawatts of clean energy. It has plans to add up to 41.8 gigawatts to that total by 2026. That side of the business is unregulated, so higher rates will have to be considered on a contract-by-contract basis. Market forces will likely ensure that NextEra can profitably grow that side of its business, even if there is some near-term disruption to deal with.
In general, higher interest rates are a headwind. But they are highly unlikely to change NextEra’s long-term growth trajectory and its dividend.
Don’t miss the opportunity
There is no such thing as a perfect investment, but the current concerns about NextEra’s growth seem likely to be temporary and perhaps a bit overblown. This is an opportunity for investors who think in decades. Investors focused on growth and income and dividends have the chance to add reliable utility stocks to their portfolios with historically attractive yields. This is not something you should miss without taking a deep dive into NextEra.
Should you invest $1,000 in NextEra Energy right now?
Before you buy shares in NextEra Energy, consider the following:
The Motley Fool Stock Advisor the analyst team has just identified who they think they are 10 best stocks for investors to buy now… and NextEra Energy was not one of them. The 10 stocks that made the cut could deliver monster returns in the coming years.
Stock advisor provides investors with an easy-to-follow blueprint for success, including portfolio construction guidance, regular analyst updates, and two new stock picks each month. The Stock advisor the service has more than tripled the return of the S&P 500 since 2002*.
Check out the 10 stocks
*Stock Advisor goes back to March 11, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Once in a Generation Investment Opportunity: 1 Dividend Growth Stock to Buy Now was originally published by The Motley Fool
