In 2001, NextEra Energy (NYSE:NEE) sported a market valuation of just $10 billion, making it the 30th most-valuable publicly traded utility on the planet. Today, the business is valued at $117 billion, making it the world's largest publicly traded utility. The second-most-valuable utility sits at a market cap of less than $80 billion.

The company's enviable growth trajectory was fueled by aggressive bets on onshore wind-power infrastructure in favorable locations, which created a massive stream of cash flow thanks to low-cost production and federal subsidies. That also turned NextEra Energy into a solid dividend stock. In fact, the business paid out $2.1 billion in common stock dividends in 2018. Shares currently sport an annual dividend yield of 2.1%.  

But the production tax credit (PTC) will be phased out for wind power projects that begin construction after the last day of 2020, while a recently acquired Florida utility requires sizable investments to improve its operations. Can NextEra Energy maintain its status as a great dividend stock?

Rolled up dollar bills forming a column chart.

Image source: Getty Images.

A sound foundation for dividend growth

NextEra generates cash flow to support its dividend from two sources: a power generation subsidiary called NextEra Energy Resources (NEER) and two Florida utilities. 

NEER sites, builds, and operates renewable energy infrastructure (and some natural gas assets, too) across the United States. The subsidiary is one of the largest capital investors in the country and generates more electricity from the wind and sun than any other company. In fact, it owns more installed wind-power capacity than all but seven countries. 

Will the phaseout of the PTC diminish investment in the domestic wind power industry? Hardly. NEER estimates that the levelized cost of electricity from onshore wind will actually decline in the years ahead, from no more than $35 per megawatt-hour (MWh) in 2020 (including contributions from the PTC) to no more than $25 per MWh in 2024 (including no contributions from the PTC). 

Those numbers will change now that Congress has extended the PTC by an additional year, but the takeaway is that wind industry investment will be just fine without it. NextEra estimates that continuing to walk down the cost curve will result in the addition of 12,000 megawatts to 15,000 megawatts of new onshore wind capacity per year from 2023 to 2030. That could allow wind power to generate at least 20% of the country's electricity by 2030. It also bodes well for NEER's income and cash flow potential in a post-PTC world.  

Metric

First Nine Months 2019

First Nine Months 2018

Change (Decline)

Operating cash flow

$6.2 billion

$5.2 billion

19%

Dividends on common stock

$1.8 billion

$1.6 billion

14%

Adjusted earnings

$3.3 billion

$2.9 billion

13%

Adjusted payout ratio

54.5%

55.2%

(13 basis points)

Data source: SEC filings.

Meanwhile, NextEra Energy continues to generate value from its two Florida utilities, Florida Power and Light (FPL) and Gulf Power. FPL is one of the largest electric utilities in the United States with more than 5 million customer accounts and 27,000 megawatts of power capacity under its helm. The subsidiary deployed a staggering $33.7 billion in regulatory capital in 2018 and plans to drive that up to at least $47 billion in 2022. Since utilities earn rate increases by investing in infrastructure and better service, that's a great sign for investors and the potential for dividend growth. 

Gulf Power is more of a work in progress. NextEra acquired the utility in early 2019 for $5.75 billion, including the assumption of $1.4 billion in debt. It serves roughly 460,000 customers in the state's panhandle and owns 2,300 megawatts of power capacity. 

According to the new parent company, Gulf Power emits 73% more carbon dioxide per MWh of generation than the national average, exposes customers to 9% more downtime per year than the state average, and has allowed customer bills to rise 30% since 2008. By comparison, FPL is cleaner, more reliable, and drove reductions in customer bills in the same span. 

By 2021, NextEra Energy plans to drive significant efficiency gains at Gulf Power, including reducing operating costs per MWh by 50%, increasing reliability by 20%, and cutting carbon emissions by 40%. That should increase net income at the utility by roughly 16% -- creating more room for long-term dividend growth. 

Taken together, the growth strategy of NEER and the efficiency strategy of Gulf Power will play a central role in NextEra Energy's plans to grow its dividend. The current plan calls for increasing dividends 12% to 14% per year through at least 2020 (from a 2017 base). That should be easily attainable considering the company's conservative payout ratio, as noted in the table above. 

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Image source: Getty Images.

It's about more than yield

Shares of NextEra don't offer the highest annual dividend yield on the market. In fact, the current 2.1% yield is a little low relative to most other electric utilities. But that's almost entirely due to the stock's epic and nearly uninterrupted rise in recent years. If you bought shares five years ago, then you'd be collecting a healthy annual dividend yield of 4.4% right now. 

Therefore, NextEra Energy is a pretty great dividend stock for investors with a long-term mind-set. As long as the company can continue to grow earnings through larger and more efficient operations, income investors should continue to reap the benefits from this renewable energy stock.