The stock market sell-off has led to declining prices in excellent and poor companies alike. When uncertainty is high, it can be comforting to fall back on fundamentals. One tried and true long-term strategy is to invest in Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years.
NextEra Energy (NEE 2.02%) is a member of this coveted list. Its dividend yield is only 2%, but there's reason to believe it will continue to be a winner for decades to come. Here's why NextEra Energy is my top Dividend Aristocrat to buy for the next 25 years.
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A primer on NextEra Energy's business
The combined market cap of the U.S. regulated electric utility industry is roughly $1 trillion. But unlike other industries, regulated utilities tend to have near monopolies over specific geographies, so they don't compete as directly with each other as firms in other industries do. NextEra Energy is a bit different. It isn't just the largest utility by market cap. It is also growing quickly thanks to its renewable energy portfolio, which serves more than just its core customer base.
NextEra Energy has two business units: Florida Power & Light (FPL) and NextEra Energy Resources (NEER). FPL is the largest electric utility in Florida, and functions like many of the nation's other regional utilities. By contrast, NEER has wind and solar centers across 26 U.S. states and four Canadian provinces. It finances and operates utility-scale projects and associated critical infrastructure like transmission and distribution and sells electricity wholesale to customers. In this vein, NEER serves as the company's key growth engine, and is the main appeal for investors who believe that renewable energy will continue to replace fossil fuels.
However, FPL is also doing its part to decarbonize its portfolio. FPL estimates it serves over 12 million people, which is over half the population of Florida. In 2005, FPL's energy mix was 42% natural gas, 19% nuclear, 18% oil, 16% purchased power, and 5% coal. In 2021, it was only 3% coal, 6% purchased power, 20% nuclear, 67% natural gas, and 4% solar. But by 2031, FPL estimates natural gas will decrease to 60% and solar will rise to 19%. By 2045, it expects to be completely off of natural gas, coal, and oil. Solar, battery storage, and green hydrogen are expected to make up 83% of its portfolio.
Meanwhile, NEER already has 28 gigawatts (GW) of generation in operation -- 24 GW of which are from wind and solar. Its backlog includes 27.7 GW to 36.9 GW of forecasted development between 2022 and 2025.
NextEra Energy isn't just investing in wind and solar for the sake of reducing its carbon footprint. Rather, lower renewable development costs have made onshore wind and solar cost-competitive with combined cycle natural gas. Favorable tax credits and federal backing of environmentally friendly power generation support NextEra's investments as well. At its core, NextEra Energy is in the business of producing, transmitting, and distributing electricity. If it can do so at a lower cost and with lower emissions, then it's a win for its business and its customers. While it's true that natural gas prices can be good for NextEra Energy's margins, commercial and residential customers will likely prefer lower cost renewable energy, especially if natural gas prices stay high for longer than expected. By developing utiltiy-scale renewable projects now, NextEra Energy will be well positioned to provide clean electricity, which could be a major advantage if climate policy continues to go greener.
The cost of growth
Investing in new assets and scaling renewable output takes time and a lot of money. Unsurprisingly, NextEra's capital expenditures, operating expenses, and net debt have been on the rise.
NEE Capital Expenditures (TTM) data by YCharts
NextEra has experience successfully developing projects, which should go a long way in helping the company execute on present and future projects at the top of the industry. It's worth mentioning that since its development pipeline is growing quickly, it has deployed a lot of capital and resources without reaping the benefits of those projects. For NextEra, the strategy is all about multi-decade growth -- giving NextEra Energy a long runway of cash flows contracted under long-term power purchase agreements. And a lot of the hard work is being done now. As impressive as NextEra is today, I wouldn't expect the company to reach its full potential until it develops NEER's backlog and transitions FPL to majority solar.
Surprising benefits of a low dividend yield
If you're interested in dividends stocks, it's likely because you appreciate a steady stream of passive income without the need to sell stock. However, dividend stocks can have completely different investor profiles.
For example, a company like NextEra Energy is better suited for an investor that likes dividends but isn't looking to supplement their income in retirement or generate the bulk of gains from dividends. Rather, the growth story is the bigger draw for investing in NextEra. The dividend is more of a cherry on top that is expected to grow as the company grows.
Investors with a 25-plus year time horizon tend to care less about a company's current dividend yield and more about where a company is heading and if it can sustain earnings and dividend growth over the long term. For that reason, you could argue that it makes more sense for NextEra to retain some of its earnings to grow the business than focus too much capital on paying dividends.
Given NextEra's track record and its aggressive short- medium-, and long-term goals for 2045, it stands out as a top Dividend Aristocrat to consider now.
