Brookfield Renewable (BEP 0.19%) (BEPC 0.09%) and NextEra Energy (NEE -1.36%) are two of the better dividend stocks in the energy industry. They both have a long history of growing their above-average yielding dividends. Furthermore, given their focus on clean energy, they should deliver sustainable growth in the decades ahead. However, for investors who only want one clean energy-powered dividend in their portfolio, here's how to decide which is the better choice.
A steady grower with a reliable dividend
Daniel Foelber (NextEra Energy): Brookfield Renewable offers an attractive one-two punch of short-term income paired with long-term growth. And for investors looking for a more pure-play renewable energy investment, I think that Brookfield Renewable is the better buy. However, if we are talking about sources of passive income specifically, I'd go with NextEra Energy over Brookfield Renewable.
Brookfield Renewable has a 3.6% dividend yield compared to NextEra Energy's 2.1%. But long-term investors know that a reliable yield is much more important than a high yield. And NextEra Energy has a more reliable dividend and a better path to future raises than Brookfield Renewable.
For starters, NextEra Energy became a Dividend Aristocrat last year after the company raised its dividend for the 25th consecutive year. By comparison, Brookfield Renewable has raised its dividend for 11 consecutive years.
In its Q4 2021 earnings call, NextEra said that it expects adjusted earnings per share (EPS) to grow by 6% to 8% per year from 2023 to 2025 off of its projected 2022 adjusted EPS. From 2021 to 2025, it expects operating cash flow to grow at least as fast as adjusted EPS. It also expects to grow its dividend by at least 10% in 2022.
To be fair, Brookfield Renewable has similar goals in that it expects funds from operations to grow high single digits per year over the long-term while passing along the majority of that cash to shareholders through the dividend.
Brookfield and NextEra are both compelling dividend stocks. What gives NextEra the edge is that its business is more diversified than Brookfield Renewable. NextEra's foundation is in Florida Power & Light (FPL), which is the largest rate-regulated electric utility in the U.S. The majority of FPL's business is still tied to natural gas, although it has made significant investments in solar energy as well.
NextEra has built upon its stable base in FPL to fund projects for NextEra Energy Resources -- its renewable energy arm. It's a similar approach to an oil and gas company using the profits from its core business to fund renewable and alternative energy investments, the difference being NextEra has been doing it for decades and has stable long-term contracts. Add it all up, and you have a compelling renewable energy investment that provides a rock-solid passive income stream.
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The higher risk seems well worth the reward
Matt DiLallo (Brookfield Renewable): Brookfield Renewable is a pure-play on renewable energy. In a sense, it's similar to NextEra's energy resource segment. It primarily owns renewable energy-generating assets and sells the power they produce under long-term contracts to utilities and other large electricity users. These agreements generate steady cash flow to support Brookfield's dividend. The benefit of this business model is that it has lots of growth potential because of the enormous need for more renewable energy. However, the drawback is that the cash flows aren't as stable as those produced by a utility like FPL.
Because of its greater income stability, investors are willing to pay a premium for NextEra's business. The diversified energy company currently fetches nearly 27 times its forward earnings. For comparison's sake, Brookfield Renewable sells for about 21 times its funds from operations (FFO) per share. That cheaper price, combined with a higher dividend payout ratio, is why Brookfield Renewable offers a higher dividend yield.
However, while there's more variability in Brookfield's cash flow, there's also more upside potential. Brookfield estimates that a trio of organic growth drivers (inflation-related rate increases, higher power prices, and its development pipeline) will support 6% to 11% annual growth in its FFO per share through at least 2026. It also sees the potential for acquisitions to add up to 9% to its per-share FFO each year. That's up to 20% annual growth. This forecast easily supports Brookfield Renewable's plan to increase its dividend by 5% to 9% per year, extending its dividend growth streak, which recently hit 11 straight years.
So, while Brookfield Renewable has a bit more risk than NextEra Energy, its combination of a higher yield and growth potential could give it the power to produce higher total returns.
The choice is between reliability and upside
Brookfield Renewable and NextEra are both excellent dividends stocks. However, NextEra Energy's diversified business units give it a more reliable yield, making it stand out as the better option for investors seeking stability above all else. Meanwhile, Brookfield Renewable stands out as the better option for investors willing to take on a bit more risk for a higher dividend yield and growth potential.
