Major market benchmarks have been soaring, which is great news in many ways. But if you are looking to invest in dividend stocks, higher stock prices can be a big problem. In fact, thanks to the bull market rally, the yield on the S&P 500 index is now just a tiny 1.3%. Dividend growth investors can do better than that with NextEra Energy (NEE 2.39%), and yield seekers can trounce that with ultra-high-yield Enbridge (ENB 0.15%). Here's what you need to know to get started.
NextEra: A dividend growth gem that's on sale
On the surface, NextEra Energy is a boring utility. And to some extent, that's true, given that its largest business is Florida Power & Light. In fact, with a $130 billion market cap, NextEra Energy is among the biggest utility stocks you can buy. However, that division makes up about 70% of the business. But don't think that NextEra Energy's regulated utility segment is totally boring, because it isn't.
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Florida Power & Light operates in the Sunshine State, which has benefited from in-migration for years. Sure, NextEra Energy has to get its rates and capital spending plans approved by regulators, so slow-and-steady growth is the norm. But the rising population has resulted in a consistently expanding customer base and increases the need for capital spending, so NextEra Energy's utility business is one of the more desirable out there. That's the foundation behind the 10% annualized dividend growth NextEra Energy has achieved over the past decade. But the company's other main segment is expected to propel dividends higher at a 10% rate through at least 2026.
The dividend growth story is backed by NextEra Energy's clean energy business, which ranks among the largest producers of solar and wind power in the world. The company hopes to as much as double its clean energy-generating capacity by 2026. That should keep NextEra Energy's earnings on the rise and support continued robust dividend boosts. Meanwhile, the stock's 3.2% yield is near the highest levels of the past decade and more than twice what you would get from the S&P 500 index. So this dividend growth machine looks like it is on sale right now.
Enbridge: A reliable high yield
Enbridge also has a mix of businesses in its portfolio of vital energy infrastructure. The biggest segment is made up of the company's midstream oil and natural gas assets, which account for around 85% of earnings before interest, taxes, depreciation, and amortization (EBITDA). The pipeline operation is largely fee-based, so it produces reliable cash flows through the energy cycle. Roughly 12% of EBITDA is derived from a natural gas utility operation in Canada, which is regulated and also provides steady cash flows. And the final few percentage points of EBITDA come from renewable power assets, which are driven by long-term contracts. Slow and steady is the name of the game for Enbridge.
But that's not such a bad thing when you consider that the dividend has been increased annually for 29 consecutive years, and that the yield is currently 7.4%. That's more than 5 times higher than what you would get from an S&P 500 index fund! The yield will likely make up the lion's share of your total return, but if you are looking to maximize the income your portfolio generates, that probably won't be an issue for you. As for dividend growth, low- to mid-single digits is a reasonable expectation.
What's interesting here, however, is that Enbridge is planning to buy three more natural gas utilities in 2024. That will make the company's business even more reliable, shifting the pipeline operation down to 75% of EBITDA, with natural gas utilities growing to around 22%. Basically, even more of the company will benefit from consistent and regulated capital spending-driven growth. Enbridge isn't exciting, but if you like collecting big quarterly dividend checks, this is a great stock to buy in April.
One for growth and one for income
There are different ways to invest in dividend stocks. If you are the type of investor that likes dividend growth, NextEra Energy looks like it's historically cheap today. Enbridge, meanwhile, has a lofty yield and a business that is designed to throw off a reliable stream of cash. Both look like great buys in April.
