Duke Energy (DUK 2.48%), like many of its peers in the utility sector, has been slowly cleaning up its power-generating portfolio by investing in renewable energy projects. Over the past decade, the company has spent $5 billion to build about 3 gigawatts (GW) of wind and solar projects.
Despite that large investment, renewables are currently only a small portion of Duke's portfolio. However, with a growing list of projects under development, the company is increasingly becoming powered by clean energy. That makes it a more appealing option for income-seeking investors since it increases the long-term sustainability and growth potential of the company's 4% dividend.
Cleaning up its portfolio
Duke Energy currently operates $145 billion of assets, including 54 GW of power-generating facilities. Renewables supply just 5% of the company's power. The rest of its electricity comes from a relatively even mix of oil and coal, nuclear, and natural gas -- at 31%, 32%, and 32%, respectively. In 2005, coal and oil generated 61% of its power, while cleaner-burning natural gas was only 6% and renewables were around 1%.
The utility, however, aims to be even cleaner in the coming years. By 2030, it expects oil and coal to supply just 15% of its power, while cleaner-burning natural gas should rise to 41% and renewables should reach 14%. That mix will help reduce Duke's carbon dioxide emissions by 40% from 2005 levels.
Duke is taking a multipronged approach to nearly triple its renewable generation capacity over the next decade. It's aiming to build up to 700 megawatts (MW) of new solar capacity in Florida alone through 2021 while also increasing its solar investments in North Carolina. The company is also building several wind farms across the U.S. to support customer demand. For example, it recently signed a 12-year power purchase agreement with telecom giant Sprint, which will support a new 182 MW wind farm in Texas. It's Duke's eighth renewable energy project this year. It's scheduled to be complete at the end of next year, and it will boost the company's wind capacity up to more than 3,000 MW.
Powering up its growth prospects
Duke's investments in renewables are an important part of the company's long-term growth plan. The company expects to invest another $2.5 billion on commercial renewables between 2019 and 2023. On top of that, it expects to spend another $6 billion on new natural gas infrastructure and $29 billion on electric utility infrastructure over that time frame. On the one hand, that's not quite as big a bet on renewables as peers like NextEra Energy (NEE) are making. NextEra is investing $25 billion to $28 billion to build an additional 11.7 GW of renewable capacity over the next few years. However, Duke's small step should still pay big dividends in the coming years.
In Duke's view, its investments should give it enough power to grow its earnings at a 4% to 6% annual rate through 2023. While that's not quite as fast as the 6% to 8% yearly growth rate NextEra anticipates through 2022, it's still a solid pace for a utility. Add in Duke's 4% dividend, and it could generate total annual returns between 8% and 10% over that span. That should enable the company to continue growing its dividend, which it has done for the past 13 years.
It's heading in the right direction
Duke Energy is transitioning its power generation fleet from dirty fossil fuels like coal to cleaner sources like renewables. It might not be moving quite as fast as NextEra, but its investment in renewables should help it generate healthy earnings growth over the next few years. Thus, Duke should be able to deliver sustainable dividend growth, making it a solid option for investors seeking a relatively low-risk high-yield stock.