NextEra Energy (NYSE: NO) today has a dividend yield of approximately 2.7%. Income investors and those with a preference for value probably won’t want to buy their stocks, but if you like dividend growth stocks, the 10% annualized payout growth that NextEra Energy has delivered over the past decade will probably get your juices flowing.
And if management is right, the future looks as good as the past in terms of dividend growth.
Why Some People Won’t Like NextEra Energy
NextEra Energy has one big problem: Wall Street knows this is a very well-managed utility. Therefore, the return is 2.7%, which is lower than the 3% average for the utility sector, based on the Vanguard Utilities Index ETF (NYSEMKT: VPU) as a proxy.
Sure, NextEra yields more than the 1.3% you’d get from an S&P 500 Index fund, but it’s just not a high-yield stock. Dividend investors and those with a value bias — noting that rates have been mid-range at best over the past decade — will likely want to look at utilities with higher rates.
That said, the current dividend yield is not the reason to buy NextEra Energy. Dividend growth is the real story: the dividend has increased by more than 180% over the past ten years.
The shares have also risen by almost exactly the same amount over that period, leading to a pretty impressive total return of over 260%, with dividends reinvested. That’s better than the S&P500 index, which had a total return of approximately 225% over the same period. Take a step back: NextEra, a utility company, beat the S&P 500!
But there’s another figure you might find interesting: return on purchase price. If you had bought NextEra Energy at its most expensive time in 2013, you would have paid $22.4375 per share, adjusted for a 4-for-1 stock split in 2020. The annualized dividend in the fourth quarter of 2013 was $0.66 per share , for a period of return on purchase of approximately 2.9%.
At the end of the second quarter of 2024, the annualized dividend was $2.06 per share, which would mean your return based on the purchase price would increase to a massive 9.2% in just over a decade. If you like dividend growth, you’ll love NextEra Energy.
The future looks bright for NextEra Energy
NextEra Energy has achieved this dividend growth by building a large renewable energy business alongside Florida’s regulated utilities. Clearly the business model has worked well based on dividend growth.
And NextEra thinks the next few years will be just as good as the past decade. Currently, the company is calling for earnings growth of between 6% and 8% per year until at least 2027. That will lead to dividend growth of 10% per year until at least 2026.
What supports this view? Management expects electricity demand in the United States, driven by demand for renewable energy, to increase significantly in the coming years.
Some numbers will help: between 2000 and 2020, electricity demand grew by only 9%, but between 2020 and 2040, NextEra expects demand to increase by 38%. That’s a drastic change in what has historically been considered a fairly sleepy sector.
But the important part of the story here is that NextEra Energy’s clean energy expertise, built over decades, positions the company well to benefit from the expected push for renewable energy. And if you buy NextEra today, you can benefit right along with the company.
NextEra Energy is always expensive
If you bought the stock in 2013 when it had a 2.9% dividend yield, you’d probably be a pretty happy dividend growth investor today. But that yield is quite close to today’s 2.7% yield, suggesting that NextEra Energy has been an expensive stock to own for a long time. However, if you’re looking for dividend growth, this tool has proven that paying for quality can work very well in the long run.
Should You Invest $1,000 in NextEra Energy Now?
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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.
Is NextEra Energy Stock a Buy? was originally published by The Motley Fool
