Over the last 50 years, stocks that paid dividends have, as a class, outperformed stocks that didn't. The best total returns for investors came from companies that had higher payout ratios (and thus, higher dividend yields), and also steadily increased their payouts over time.
So for investors who hope to build generational wealth, high-yielding dividend growth stocks are among the best options. Three such stocks that our contributors think will produce great returns in years to come are The Southern Company (SO -0.21%), Brookfield Renewable (BEPC -1.24%) (BEP -0.86%), and NextEra Energy Partners (NEP -0.42%).
Buy this utility and reinvest the dividends
Reuben Gregg Brewer (The Southern Company): Investors often focus too much attention on price appreciation when evaluating investments. But over time, dividends have accounted for around a third of the broader market's total returns. And dividends provide stability, as well, giving you something to look at other than stock prices when the market is in turmoil. So why not pick up some shares of a company that has held its dividend steady or increased it annually for more than 75 consecutive years?
The Southern Company, one of the largest electric and natural gas utilities in the United States, is currently offering a yield of about 3.8%. While that's not huge, it is well above the yield that the S&P 500 Index is delivering, and is notably better than the average utility's 2.7% yield, based on the Vanguard Utilities Index ETF as a proxy. And then there's that incredible dividend streak that you can build on by letting the dividends automatically reinvest and compound over time.
The only major negative with this stock is that The Southern Company is currently constructing a pair of nuclear power plants that are delayed and over budget. However, they are now expected to be complete by the end of next year. Once they're online, that headwind will turn into a tailwind as the utility will get to include two reliable baseload power sources that emit zero carbon. That's right in line with the current environmental zeitgeist, and should position the company and its shareholders well for future dividend growth.
An unparalleled opportunity
Matt DiLallo (Brookfield Renewable): Humanity needs to dramatically reduce its carbon emissions to avoid the worst potential impacts of climate change. According to one estimate, full decarbonization of the global economy will require investments of more than $150 trillion over the next 30 years. That offers unparalleled commercial opportunities for companies focused on decarbonization.
One of the early leaders in capitalizing on the decarbonization megatrend is Brookfield Renewable. It operates a globally diversified portfolio of renewable energy operations. It currently has 21 gigawatts (GW) of clean power production capacity, enough to power the city of London with emission-free energy. Meanwhile, it has another 69 GW of renewable energy assets in development, which will prevent carbon emissions equivalent to New York City's.
Brookfield estimates that its development projects will help grow its cash flow per share by 3% to 5% annually. Add in inflation-driven annual rate escalations on its current power contracts and its ability to secure higher rates for power as its existing agreements expire, and Brookfield expects to be able to organically grow its cash flow per share by 6% to 11% per year. That will easily support the company's plan to expand its dividend by 5% to 9% per year. On top of that, Brookfield sees the potential to add up to another 9% to its bottom line each year by making acquisitions.
That's up to 20% annual growth on top of a steadily rising dividend that at the current share price yields 3.6%. That's the type of total return profile that can produce lasting wealth.
A stock with huge growth potential
Neha Chamaria (NextEra Energy Partners): Companies that pay regular, generous, and growing dividends can reward shareholders richly in the long term, especially if their management teams prioritize shareholder returns. NextEra Energy Partners is one such company.
Investors who bought shares of NextEra Energy Partners when it debuted on the New York Stock Exchange in 2014 and held on have seen those shares more than double their value since. And those who reinvested their dividends all along have made a lot more, because the company has increased its dividend every quarter since 2014. Its annualized dividends grew by almost 300% through the fourth quarter of 2021.
While past performance doesn't guarantee future results, investors who buy and hold NextEra Energy Partners stock and reinvest their dividends are likely to mint money over the long run. There are two reasons why.
First is the growth potential in the company's business. NextEra Energy Partners owns one of the world's largest clean energy portfolios, with a focus on wind and solar energy. To grow, the company can acquire assets from its sponsor, NextEra Energy (NEE -0.25%), or other third parties. With countries around the globe working to transition from fossil fuels to clean energy, the opportunities are huge. And NextEra Energy is already the world's largest producer of wind and solar energy.
Second, since these are contracted assets, NextEra Energy Partners can expect to generate steady cash flows and pay generous dividends. Right now, it aims to increase its payouts by 12% to 15% annually through 2025, and I strongly expect that pattern to continue beyond that. All of that, combined with its already-high yield -- at the current share price, about 3.8% -- makes NextEra Energy Partners the kind of stock that could help you build long-lasting wealth for your family.