As long-term investors, we want to be in the market through the ups and downs, but that can be difficult emotionally. So it makes sense to own stocks that will help you not to panic when market turbulence hits, as it did this past spring when the Dow Jones Industrial Average experienced routine daily swings of 5% or more in both directions.
One way to avoid that uneasy feeling is to be invested in equities that offer stability in the long term. That should accomplish two things: create a lower propensity to fall as much as other stocks, and provide an emotional crutch through the volatility. But with that first one, you likely will also give up the potential for outsize growth.
NextEra Energy (NYSE:NEE), though, can bring investors the best of both worlds. If you're worried about another market crash, here's why NextEra should be on your radar.
A utility, but with growth
NextEra is a Florida-based company that owns Florida Power & Light, the largest regulated electric utility in the U.S. by retail megawatt-hour sales, as well as Gulf Power, which serves the northwest part of the state. Its other subsidiary is NextEra Energy Resources. This segment, along with its affiliates, is the world's largest generator of wind and solar power. It also has been investing in battery storage. This renewable energy segment differentiates it from other utilities, and helps support NextEra's estimate of 10% to 12% annual total-return potential through 2022 with earnings growth and dividends.
Proof of that growth stands out when comparing its earnings per share and its historical market capitalization growth against fellow utilities Consolidated Edison (NYSE:ED), Duke Energy (NYSE:DUK), and Dominion Energy (NYSE:D).
NextEra's energy resources segment currently operates about 24 gigawatts (GW) of energy generation, mostly in wind and solar, and has another 13 GW from renewables projects in its backlog. The company thinks there's plenty of room to grow, as it sees about 80 GW of renewables demand in the U.S. alone through 2022.
The International Energy Agency (IEA) backs up those predictions. In its renewable energy market-outlook update for 2020 and 2021, the organization forecasts that additions to global renewable energy capacity will resume growth to new highs of almost 200 GW in 2021. That forecast also accounts for a pandemic-related dip in 2020. Importantly for NextEra, in the May 2020 IEA report, the agency said that the U.S. will still see capacity-addition growth in 2020.
The growth component that differentiates NextEra from other utilities also means that the share price could be more affected by a market crash in the short term. Investors should be prepared for that, and should note that it did drop by about 35% from its March 2020 highs before recovering.
But the stability that comes with the regulated utility business can help investors by providing income through the market cycles. Customers need electricity regardless of the economic environment. Additionally, the company says it will increase its dividend by 11% per year through 2022. And over the longer term, the share price has remained less volatile than the market. The company notes it has a beta for the past five years of less than 0.7. This means it theoretically is only 70% as volatile as the S&P 500 Index (NYSEMKT:IVV).
NextEra Energy might not be the right stock for a retiree who seeks income from the high dividend yields that most utilities are known for (it currently yields just under 2%). But with prospects for continued dividend growth, along with a long runway for increases in its renewables generation capacity, longer-term investors who hold the stock should feel all right about riding it through the next market crash.