Dividend-paying utility stocks were once seen as the cornerstone of a conservative investor’s income portfolio. The market is much bigger today than it was when utilities were called “widows and orphans” stocks, but more dividend stock options don’t change the desirability of adding some boring utilities to your dividend stock portfolio. Now that June is here, you might want to take a look NextEra Energy (NYSE: NO), Brookfield Renewable (NYSE: BEPC)(NYSE:BEP)and, for those with a contrarian bent, Dominion energy (NYSE:D). This is why.
1. NextEra Energy is a dividend growth machine
NextEra Energy has grown its dividend at an annual rate of about 10% per year over the past decade. That’s a good figure for any business, let alone a boring utility company. To put that number in perspective, dividend growth in the mid-single digits would normally be considered strong for a utility. But the point is: NextEra also expects 10% dividend growth until at least 2026. If you’re a dividend growth investor or a growth and income investor, you’ll love NextEra Energy.
NextEra Energy achieves its dividend growth with a unique approach. The core of the company is a large regulated utility, largely consisting of Florida Power & Light. This division ensures slow and steady growth. In addition to its regulated utility operations, NextEra has one of the largest solar and wind energy businesses in the world, which is where the growth of the overall business comes from.
By 2026, NextEra plans to build as much as 41.8 gigawatts of renewables, which is a huge amount and suggests that there is still a lot of growth ahead for the company as a whole. While the stock yield is modest at 2.6%, the dividend growth story is the real attraction here.
Brookfield Renewable focuses on clean energy
That said, some investors may look at the utility sector and think clean energy is the real future, which is why NextEra is investing so heavily in this space. If you want to leave the old technology behind and focus solely on the new, Brookfield Renewable is a great option, either in the form of a limited partnership or through the corporate share class. Both offer a growing income stream and attractive returns.
The partnership class currently yields about 5%, while the corporate class has a dividend yield of about 4.5%. (Demand from institutional investors who may not be allowed to own partnerships is likely the cause of the return difference, as the two classes pay identical distributions.)
Brookfield Renewable owns a globally diversified portfolio of clean energy assets, including hydro, solar, wind and storage. However, it is important to understand that Brookfield Renewable is operated by Brookfield Asset Management (NYSE: BAM). It’s a way for retail investors to invest alongside a giant asset manager with a long history in the infrastructure sector.
This changes the story a bit, because Brookfield Renewable’s focus isn’t just on buying and operating renewable energy sources. The goal is to buy assets at attractive prices, increase their value through strong operations, and then sell them if it can get an attractive price. That’s a little different than a traditional utility, but so far it’s worked out well for income-oriented investors.
Dominion Energy is in turnaround mode
The latest stock is Dominion Energy, one of the largest regulated utilities in the United States. It has a yield today of about 5% (for reference, the average utility returns about 3.3%). And it recently cut its dividend after selling a large midstream business to Warren Buffett’s Berkshire Hathaway. Following this event, management decided to conduct a business analysis that resulted in the sale of three natural gas companies Enbridge. Today the utility is essentially a pure electricity generator.
So the real attraction here lies in the future. Currently, Dominion is working to strengthen its balance sheet (at least in part through asset sales) and bring its dividend payout ratio back in line with its peer group. It will take a few years for these efforts to bear fruit, but once Dominion gets its fiscal house in order, dividend growth is likely to be higher as earnings growth increases.
The earnings growth story here is quite reliable, given the regulated activities that underpin Dominion’s business. Add to that the significant exposure to one of the most in-demand data center markets (data centers use a huge amount of energy) and there is another reason to be bullish. While this story is all about the turnaround, this high-yield utility could be attractive to long-term investors with a contrarian bent right now.
Plenty of dividend opportunities on non-residential land
Don’t ignore utilities because they’re just boring stocks; that is not the case at all. If you’re a dividend growth expert, you’ll love NextEra Energy. If you want to move with the world toward clean energy while generating an attractive and growing revenue stream, Brookfield Renewable will be of interest. And if you like a good turnaround story, you’ll appreciate Dominion Energy and its high returns.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool holds positions in and recommends Berkshire Hathaway, Brookfield Asset Management, Brookfield Renewable, Enbridge, and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners and Dominion Energy. The Motley Fool has a disclosure policy.
3 Utility Dividend Stocks to Buy Hand Over Fist in June was originally published by The Motley Fool
