1 Dividend Stock With Growth Potential

NextEra Energy (NYSE: NEE  ) is a tomato. Cooks can't decide whether tomatoes are vegetables or fruits, and investors can't decide whether NextEra's a dividend play or a growth stock. But, the true connoisseur doesn't care. If NextEra looks good, he takes a bite. Let's test the taste of this utility to see whether it might mix with your portfolio for delicious returns.

Banana split
The first thing to know about NextEra is that it's not your normal utility company. Comprised of two separate businesses, this corporation is split into both a utility provider and a wholesale energy generator. Florida Power and Light (FPL) illumines the homes of nine million Sunshine State residents. Since FPL's rates are regulated by the government, FPL's earnings are steady and increase in relation to its customer base.

NextEra Energy Resources (NEER) is the unregulated older brother that enjoys a bit more freedom than FPL. It's a wholesale electricity generator, and sells its 16,600 watts to utilities across 22 states and three Canadian provinces, according to its most recent 10-K report.

Combined, these two divisions make NextEra the largest renewable energy producer in the United States.

Squeaky clean
NextEra enjoys a fair amount of diversity due to its regulated and unregulated divisions, but the real risk reduction secret sauce of this company lies in its energy sources. Both FPL and NEER are known for their clean and/or renewable energy sources, including wind, hydro, and a bit of solar to boot.

FPL focuses less on renewable and more on clean energy, with natural gas comprising 65% of the company's electricity generation in 2011. Nuclear made up 20%, with coal and oil amounting for only 6% of total energy produced.

NEER has embraced renewable resources, and produced 35% of its electricity from wind in 2011. In its most recent 10-Q, NextEra predicts that wind and solar capital expenditures will each account for more than 30% of total capex for the next four years.

You say tomato, I say... tomato
As one of the largest electricity companies around, NextEra occupies an interesting spot at the nexus of income and growth. For income investors, its 3.5% annual dividend yield is nothing to yawn at. Plus, the company has consistently managed to increase its dividend at a higher rate than inflation. In my fellow Foolish writer Nicole Seghetti's "Investor's Guide to Utilities," she finds the following results for NextEra and other utilities:

Company

Dividend Yield

Dividend: 5-Year-Growth Rate

Payout Ratio

PPL (NYSE: PPL) 5.0% 4% 48%
Public Service Enterprise Group (NYSE: PEG  ) 4.5% 3% 53%
NextEra Energy 3.5% 7% 45%
Aqua America (NYSE: WTR) 2.7% 7% 59%

Source: The Motley Fool

But, unlike other utilities listed above, NextEra Energy has untapped growth potential that could offer lucrative returns over the next few years. Generally, the only way that utilities significantly grow revenue is by increasing their customer base. NextEra is geographically poised to do just that, but it can also cut costs by sourcing cheaper energies.

For now, wind and solar are only cost-effective due to government subsidies, but NextEra's current investment in these renewables will put it ahead of its competition as traditional sources like coal and oil phase out.

Although solar currently comprises just 1% of its generation capacity, NextEra recently partnered with General Electric (NYSE: GE  ) to acquire a 550-megawatt solar farm in California, increasing its solar capacity by approximately 85%. NextEra already has the capabilities to seriously ramp up its wind energy generation, and can phase natural gas in or out depending on price fluctuation and policy changes.

Source: NextEra 10-K

Foolish bottom line
I'm a long-term investor, and I admire NextEra's vision. As a dividend investor, I can enjoy a decent dividend while hoping for upside growth potential. As a growth investor, NextEra's dividend offers income today for big rewards tomorrow. I'm making an "outperform" call on my Motley Fool Caps page, and am looking forward to seeing where this corporation heads in the next few years.

To balance your utility investments across other sectors, be sure to also check out The Motley Fool's special free report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report outlines the best companies offering exceptional dividends, and is a must-read for investors looking to sustainably grow their portfolios. But hurry: It's available for a limited time only, so click here for your free copy today.

Fool contributor Justin Loiseau has no material interest in any companies mentioned in this article, but he does regularly use electricity. You can follow Justin on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.

Motley Fool newsletter services have recommended buying shares of Aqua America. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2012, at 1:08 PM, Howard1ii wrote:

    Seems to me the FPL half has a lot of risk to it since hurricanes seem to roll through there twice a year and could disrupt their service (maybe they are smarter than our electricity supplier up here in the Seattle area and have already buried their power lines.) We regularly lose power, and PG&E spends millions bringing in outside electrical guys to fix the mess, plus they lose their revenue stream while we wait for the lights to come back on. NEER on the other hand sounds like it could be a good way to invest in alternative energy.

  • Report this Comment On September 29, 2012, at 10:34 PM, Shawnerz wrote:

    "It's a wholesale electricity generator, and sells its 16,600 watts to"

    Umm, I think that should have been "16,600 Megawatts."

    Switching from electricity back to investing, the key for NEE is how it will manage and service it's $25.2B debt load.

    Nuclear is nice, but carries a lot of liabilities.

  • Report this Comment On September 29, 2012, at 10:36 PM, corpsbum wrote:

    My guess would be that their power generaton centers are are spread across the country. Just a hunch since most solar farms are not located in hurricane country, nor wind farms. This would be worth into further.

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