HomeBusinessForget NextEra energy. Buy this beautiful dividend king instead

Forget NextEra energy. Buy this beautiful dividend king instead

NextEra Energy (NYSE: NO) is one of the largest utility stocks you can buy, with a massive market cap of $150 billion. But that market cap is really a function of the stock’s popularity on Wall Street, giving it a somewhat meager dividend yield of 2.8%. The average utility efficiency is 3% when used Utilities Select Sector SPDR ETF as a sector proxy. You can do better if you want to maximize the passive income your portfolio generates. And you can do it with a Dividend King tool!

NextEra Energy: Credit where credit is due

In no way should investors think NextEra Energy is a bad company. On the contrary, it’s probably one of the best managed utilities you can buy. The problem is that this fact is quite well known. NextEra Energy has grown its business rapidly for years using a two-pronged approach, combining a regulated utility (Florida Power & Light) and a renewable energy company. The regulated utility is the foundation, while the clean energy operation is the growth engine.

The real appeal here isn’t the yield; it’s the growth. This is especially evident in the dividend area, with an annualized dividend increase of approximately 10% over a ten-year period. That’s good for any business, but pretty incredible for a utility. Half that percentage would be a good number for the slow and steady utility sector. If you’re a dividend growth investor or a growth and income investor, NextEra Energy should probably be on your short list. But income investors will be better off looking elsewhere for returns.

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Black Hills is a dividend king

One of the places you should probably start your search is with utilities that have proven they can provide reliable revenue streams. Dividend King Black hills (NYSE: BKH) will quickly appear on your radar, as it is only one of the few utilities with more than 50 annual dividend increases behind it. And it has a dividend yield of almost 5%, which is much better than what NextEra Energy has to offer, but also higher than average for a utility. In terms of dividend growth, Black Hills has seen an annualized growth rate of about 5% over the past decade. That’s still pretty good, even if it doesn’t match what NextEra Energy has achieved.

That said, Black Hills is a much smaller utility, with a market cap of just $3.6 billion. It serves 1.3 million natural gas and electric utilities in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming. The number of customers is growing almost three times as fast as the population growth in the United States, so the country also has a solid business foundation.

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The problem is that Black Hills has a fairly heavy debt load. Rising interest rates have increased the company’s costs and squeezed profits. The country withdrew its investment plan in 2023, specifically to pay off its debts. Still, higher interest rates will remain a headwind in the near term. In the long run, however, regulators are likely to take higher interest costs into account when approving the company’s rates and investment plans. So over time, these headwinds should diminish. In the meantime, you have the opportunity to buy a Dividend King utility with a very attractive dividend yield.

How attractive is Black Hills’ yield?

NextEra Energy is a great company and an attractive stock for the right type of investor. If that investment shoe doesn’t fit here, you’ll want to look elsewhere. For income investors, reliable dividend payer Black Hills is a good option. But one final takeaway is worth considering: Black Hills’ dividend yield is near its highest level in the past decade. That means it historically looks attractive if you value large passive income streams.

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Should You Invest $1,000 in NextEra Energy Now?

Consider the following before purchasing shares in NextEra Energy:

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Reuben Gregg Brewer has positions in Black Hills. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.

Forget NextEra energy. Buy This Beautiful Dividend King Instead was originally published by The Motley Fool

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