The broader stock market sell-off continues as all three major indices fell on Friday to finish the week at or near their respective year-to-date lows.
The stock market goes through cycles. And although watching your ticker counter bleed red day after day is painful, it's important to keep a long-term perspective on your investments and stay the course. However, this strategy only works if you're invested in quality businesses that can outlast a periodic market crash. One such quality business is the leading U.S. utility, NextEra Energy (NEE -8.23%).
NextEra Energy has the largest renewable energy capacity of any North American operator. After a period of five years, a $20,000 investment in this company will likely generate more than $2,000 in passive dividend income aside from any price appreciation it might accrue. Here's what makes NextEra Energy a great dividend stock to buy now.
NextEra has earned its premium price
After raising its dividend in 2021, NextEra Energy became one of the newest companies to earn a coveted spot on the list of Dividend Aristocrats. A Dividend Aristocrat is an S&P 500 component that has paid and raised its dividend annually for at least 25 consecutive years. NextEra Energy is one of just three Dividend Aristocrat utilities, the other two being Consolidated Edison and Atmos Energy, which are much smaller companies.
NextEra Energy is the largest U.S. utility by market cap, not because it generates the most sales or earns the most profit, but because it has aggressively invested in renewable energy and is now several years ahead of other utilities in diversifying its energy mix away from coal and natural gas.
On the surface, NextEra Energy's valuation can appear lofty. After all, NextEra Energy has a market cap of $145.6 billion and generated $17.1 billion in 2021 revenue, while Duke Energy -- one of its peers -- has a market cap of $76.3 billion and generated $25.1 billion in 2021 revenue. But the stock market is forward-looking. It cares less about how a company performed in the past and more about how it's going to perform in the decades to come. And NextEra is much better positioned than its peers in this regard.
Building upon an entrenched foundation
NextEra's core business is Florida Power & Light (FPL), which is a subsidiary of NextEra Energy. FPL is the largest rate-regulated electric utility in the U.S., and its business is mostly tied to natural gas despite significant solar investments. The beauty of NextEra's business is that it has used excess profits from FPL, and another subsidiary called Gulf Power (which it bought from The Southern Company in 2019), to fund developments in NextEra Energy Resources (NEER), its renewable arm.
NextEra Energy expects to increase its dividend by 10% in 2022 and grow adjusted earnings per share (EPS) by 6% to 8% per year from 2023 to 2024. Add it all up, and you have a diversified utility with a renewable energy focus.
Going for quality over quantity
Like other regulated electric utilities, the vast majority of NextEra's business is tied to long-term contracts that provide stable inflows to support the dividend. Yet the main drawback of NextEra is that its dividend yield is lower than its peers. In fact, if we look at the 10 largest U.S.-based regulated electric utilities by market cap, we'll see that NextEra has the second-lowest yield behind PG&E Corp. (which used to pay a dividend before the 2018 California wildfire scandal).
However, NextEra more than makes up for its yield with growth. Between 2020 and 2021, NEER constructed over 9.5 gigawatts (GW) of renewable energy and storage projects. Even after that push, NextEra still has a total renewable backlog of over 16.6 GW, which is 25% larger than the size of its backlog at the end of 2020. That means that NextEra is commissioning and completing projects while also growing its pipeline of new projects, a sign that growth is accelerating.
"We have been in the renewables business for more than 30 years and have the experience, resources, balance sheet, talent and advanced data capabilities necessary to execute complex renewable energy generation and storage integration projects at scale," said NextEra Energy CEO Jim Robo on the company's Q4 2021 conference call.
In sum, NextEra Energy has the trajectory needed to sustain future dividend raises and grow its business, which is more important than earning a percentage point or two higher yield than one of its peers.
The well-rounded option worth considering now
NextEra Energy is arguably one of the best renewable energy investments out there, especially for investors who aren't exposed to the industry. Unlike other aspects of the renewable energy industry that depend on capital markets and are highly vulnerable to supply chain issues, NextEra has an established and steady business with an attractive long-term future. For investors who value a blend of capital preservation, passive income, and growth, NextEra is a great choice to consider now.