The utility sector has dramatically underperformed the S&P 500 index over the past year, trailing the broader market by more than 15 percentage points. Higher interest rates are a big part of the story, as utilities typically rely heavily on debt to finance their businesses. But the sector is home to many reliable dividend stocks.
You might want to take a closer look at NextEra Energy (NYSE: NO), Brookfield Renewable (NYSE: BEP) (NYSE: BEPC)And Dominion Energy (NYSE: D) in July, while Wall Street is still gloomy and sector yields are still high.
NextEra Energy is a dividend growth machine
NextEra Energy has increased its dividend annually for three decades. That’s a pretty impressive streak, but it’s not the best out there. In fact, there are a handful of utilities that have achieved Dividend King status. Where NextEra Energy stands out is in dividend growth, with the annual dividend increase over the past decade running at a whopping 10% or so. That figure is also 10% over the past three- and five-year periods. And management is forecasting dividend growth of 10% through at least 2026, so the streak of massive dividend growth isn’t over yet.
10% dividend growth is good for any business, and it’s especially good for a utility. How does NextEra achieve this? It has a slow-and-steady growing regulated utility business, and on top of that, it has built one of the largest renewable energy businesses in the world. That last business is its growth engine, and given the global shift to cleaner energy sources, it likely has a long runway for growth.
The problem with NextEra Energy is that investors know exactly how well it is run and have priced it accordingly. Its yield is below average for a utility at 2.9%. But if you’re a dividend growth investor, this is probably the utility stock you want to own.
Brookfield Renewable focuses entirely on clean energy
If you like the idea of investing in clean energy but are looking for a higher yield than NextEra Energy offers, consider Brookfield Renewable. It’s not technically a utility, but it owns clean energy assets worldwide and deserves your attention given its whopping 5% or 5.7% yield. Why are there two yields? Because there are two stock options, one structured as a partnership and one as a traditional corporation.
Both Brookfield Renewable Partners and Brookfield Renewable Corporation represent the same entity. The only difference is the demand from investors for each type of stock. The partnership is a bit more complicated because it has a K-1 form that needs to be dealt with when it comes time to file taxes. However, it is not a master limited partnership, so it can still be owned in a tax-advantaged retirement account.
If you want to maximize your passive income stream, Brookfield Renewable Partners is a good option. If you don’t want to deal with the K-1, a 5% yield is still attractive. Either way, you’re still getting a globally diversified portfolio of clean energy assets.
But more importantly, you can invest together with others Brookfield Asset Management (NYSE: BAM)that oversees Brookfield Renewable. Brookfield Asset Management has decades of experience and is a respected infrastructure investor. You could do a lot worse than partnering with this firm by adding high-yield Brookfield Renewable to your portfolio.
Dominion Energy is recovering
The final entry on this list is a turnaround story in the form of Dominion Energy. As a simple regulated utility, it has undergone a major corporate overhaul over the past decade. The most recent overhaul has resulted in the sale of large non-core assets (including three regulated natural gas utilities) so that the company can pay down debt, reduce its payout ratio, and focus on its reasonably well-positioned regulated electricity business.
The dividend yield currently sits at around 5.4%, but the dividend won’t grow until the payout ratio is in line with the industry average, which will likely take a few years. Given the yield, though, investors are being well paid to wait. After that point, the dividend should grow in line with earnings, which the company believes can grow 5% to 7% per year. Notably, Dominion operates in one of the fastest-growing data center markets in the world, which should boost demand for power in the region.
There is still time, but don’t wait too long
Utilities are largely out of favor today as Wall Street worries about the long-term impact of higher interest rates. While interest rates are a headwind, the sector will adapt to the change over time, just as it has during previous rate-change cycles. If you can stomach getting in when others are fearful, buying now when the news is bad can lead to strong returns over the long term. And three good places to start in the utilities sector are NextEra Energy, Brookfield Renewable and Dominion Energy.
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Reuben Gregg Brewer has positions in Dominion Energy. The Motley Fool has positions in and recommends Brookfield Asset Management, Brookfield Renewable, and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners and Dominion Energy. The Motley Fool has a disclosure policy.
3 Utilities With Attractive Yields to Buy Massively in July was originally published by The Motley Fool
