It is beyond dispute that NextEra Energy (NYSE: NO) is a well-run company. But that fact is so well known that investors have upgraded the stock to levels that likely fully reflect the information. If you’re looking for a good mix of dividend income and dividend growth, you might want to consider WEC Energy (NYSE: WEC) instead of NextEra. Here’s why.
NextEra Energy’s value is fully priced in
NextEra Energy is a solid dividend growth utility, with a strong regulated utility core (largely Florida Power & Light) and a fast-growing renewable energy operation. That combination has allowed the utility to increase dividends annually for three decades. But the real treat for investors is that the dividend growth rate has been an attractive 10% per year over the past decade.
Ten percent dividend growth for a utility, an industry notoriously slow and dull, is incredible. Half of that would be considered a good number. Interestingly, management is also targeting 10% dividend growth per year through at least 2026, so this trend isn’t likely to stop there. That number is backed up by an earnings growth forecast of 6% to 8%. If you’re a hardcore dividend growth investor, it would be understandable if you wanted to buy NextEra Energy.
The problem is valuation. NextEra Energy’s success and positive outlook are well known. That usually puts its stock at a premium to the utility sector. For example, NextEra’s dividend yield is currently around 2.6%. The average utility, using Utilities Select Sector SPDR ETF as a proxy, is about 3%. That may not seem like a big difference on an absolute basis, especially when you consider the S&P 500 The index’s return is a meager 1.2%, but that equates to about 13% less income being generated each year.
WEC Energy brings you more income
For comparison, WEC Energy offers a dividend yield of 3.6% today. That’s 20% more than the average utility and 33% more than what you’d get if you owned NextEra Energy. That sounds pretty attractive if you’re trying to maximize the income your portfolio generates.
But what about dividend growth? WEC Energy raised its dividend by about 7% in January. It has been raising its dividend annually for two decades. The average increase over the past decade has been about 7%. That’s a bit slower than NextEra Energy, but its starting yield is so much higher that investors looking for a better mix of yield and dividend growth may find it more attractive.
That said, WEC Energy isn’t as big or as diversified as NextEra. WEC provided natural gas and electricity to 4.7 million customers in parts of Wisconsin, Illinois, Michigan and Minnesota. It’s a much more boring utility, but it still has big plans. Its five-year capital expenditure target is $23.7 billion, which is expected to boost earnings 6.5% to 7% per year through 2028. If history is any guide, the dividend will grow roughly in line with earnings.
Again, that’s nearly as good as NextEra, but with a noticeably higher starting yield. And that’s the big story here. NextEra is a great utility, but one that’s mostly fully priced. WEC Energy is a very good utility that seems to be trading at a more attractive level. Interestingly, even after a recent stock rally, the dividend yield is still near the high end of WEC Energy’s 10-year yield range.
WEC Energy is worth taking a closer look
No one would blame you for buying a market leader like NextEra Energy. However, that doesn’t mean it’s the best option for all investors. If you’re willing to accept a little less dividend growth potential for a utility with a still-strong earnings growth profile and a much higher yield, put WEC Energy on your shortlist today. And if you already own NextEra Energy, consider adding a new position in WEC Energy.
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Reuben Gregg Brewer has positions in WEC Energy Group. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
This Overlooked Utility Is Beating NextEra. Is It Time to Buy? was originally published by The Motley Fool
