If you are looking to create a lifetime’s worth of income by buying dividend stocks, you might overlook NextEra Energy (NEE -0.85%) because its yield is “only” 3%. That’s about average for a utility, and there are plenty of higher-yielding choices out there for you to consider, both inside and outside the utility sector. But there’s one important factor to consider here that might change your mind. NextEra’s dividend has grown, and looks like it will continue to grow, at an exceptionally rapid pace. Here’s why this dividend stock could set you up for a lifetime of income.
What does NextEra Energy do?
NextEra is really two companies in one. The core of the business is its regulated utility operation. This is, basically, a slow and steady foundation. Like all regulated utilities, NextEra’s Florida-based utility operations have been granted a monopoly in the markets it serves. It then has to get capital investment plans and rate increases approved by the government. In most cases, this is not an approach that leads to rapid growth.
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That said, the state of Florida has benefited from in-migration for decades, so the population has been growing rapidly. More customers mean more income, and also mean that a higher level of investment is needed to keep up with demand. So even though the regulated side of NextEra Energy’s business is the slower-growing side, it is still advantaged relative to other utilities.
NextEra Energy’s other important business is its clean energy operation. This business is built on long-term contracts, so it is a highly reliable cash generator. Demand for clean energy is high, and the company is able to expand this business rapidly. For example, management expects to install as much as 46.5 gigawatts of renewable energy by 2027, up from 36 gigawatts today. In other words, this business is likely to double in size in just a few years.
What’s NextEra’s dividend yield today?
If you buy NextEra Energy right now, you’ll collect a 3% dividend yield, which, as noted, is about average in the utility sector. But NextEra Energy stands out from the average utility in one very important way — dividend growth. Over the past decade, the dividend has grown at roughly 10% a year on an annualized basis. That’s huge in the utility sector, where 5% growth is considered very good.
NextEra Energy expects the dividend to grow by 10% a year through at least 2026. Unless it runs into some sort of major headwind, history suggests that the dividend can keep growing at that rate beyond 2026. Given all the dividend increases, over time the yield on purchase price with NextEra Energy becomes an important metric to consider.
NEE data by YCharts.
Some math will help here. If you bought NextEra Energy at its highest price point in 2013, a share of the stock would have cost $22.45 (that figure, and the others noted here, has been adjusted for a 4:1 stock split in 2020). The quarterly dividend at that point was $0.165 per share, leading to a yield of around 2.9%, about where the yield is today. However, after years of rapid dividend growth, the dividend today is $0.515 per share, which leads to a yield on purchase price of over 9%! Oh, and the stock price today is around $69, so you benefited from notable capital appreciation along the way.
NextEra Energy is a high-yield “sleeper”
High-yield stocks often have slow dividend growth rates. So while maximizing income today may feel good, you will probably end up with only modest growth in your income stream over time — often something close to the rate of inflation growth (basically low single digits). That’s not a bad outcome, but if you are willing to step down in yield just a little bit and buy a dividend growth stock like NextEra Energy, you can supercharge your income portfolio.
Sure, NextEra Energy doesn’t look like a high-yield stock right now, but continued dividend growth could quickly turn it into one of your highest yield on purchase price investments. That can help set you up for a lifetime of income that not only keeps up with inflation, but outpaces it over the long term.
