I love to generate passive income because it gives me more financial flexibility. Dividend stocks are one of my leading sources. Because of that, I'm routinely purchasing more shares of various dividend-paying stocks each month as I have the cash to invest.
A rock-solid income stream now
NextEra Energy's dividend might not appeal to investors seeking a high dividend yield. However, at 2%, it's above the 1.6% yield on an S&P 500 index fund.
More importantly, that payout is on an incredibly firm foundation. As a utility, NextEra Energy generates very stable earnings backed by government-regulated rate structures and long-term contracts. Meanwhile, electricity and natural gas demand tend to be relatively stable even during a recession. That provides the company with steady income to support its payout.
NextEra Energy pays a conservative percentage of its earnings via dividends. Its dividend payout ratio was 60% at the end of last year, below its peer group average of 65%. That gives it a bigger safety net while allowing it to retain more cash to finance expansion.
NextEra also has a top-notch balance sheet with A-rated credit backed by solid credit metrics. That gives it greater access to low-cost financing to invest in expansion projects.
Finally, it has an additional source of capital that others don't possess: NextEra Energy Partners (NEP -20.13%). It created that entity to acquire, own, and operate clean energy infrastructure. That strategic relationship allows NextEra Energy to recycle capital by selling income-producing clean energy infrastructure assets to NextEra Energy Partners. In turn, that provides NextEra with cash to finance new development projects, while giving NextEra Partners another cash-flowing asset to support its rapidly rising dividend.
Even more income later
What takes NextEra Energy's dividend to a whole other level is its growth potential. The company aims to grow its payout by around 10% annually through at least 2024.
Powering that outlook is the company's rapidly rising earnings. NextEra Energy is investing heavily to continue building a leading electric utility in Florida and a world-class renewable-energy-generation portfolio. The company expects to invest $85 billion to $95 billion through 2025 on its dual growth drivers. It anticipates these investments will grow its adjusted earnings per share by around 10% per year at the high end of its guidance range. Meanwhile, it sees operating cash flow expanding at or above that level.
The company's ability to grow its dividend at a high rate should give it the power to produce market-beating total returns. Over the last 15 years, NextEra Energy has grown its adjusted earnings per share at an 8.4% compound annual rate while increasing the dividend at a 9.8% yearly pace. That rapidly rising dividend has helped power total returns nearly triple those of the S&P 500 during that timeframe.
Meanwhile, NextEra Energy should have plenty of power to continue growing at an above-average rate for years to come. It unveiled its bold "Real Zero" strategy earlier this year to eliminate carbon emissions from its Florida utility by 2045 and lead the country's decarbonization. That positions it to capitalize on a $4 trillion commercial opportunity that could drive growth for the next 30 years.
A great dividend stock for the long term
NextEra Energy has everything I could want in a dividend stock. It offers an above-average yield backed by rock-solid financials. Because of that, it has the financial flexibility to capitalize on the enormous renewable energy opportunity. That should power healthy growth for years to come, allowing NextEra Energy to expand its dividend at an attractive rate.
This combination of growth and income should enable NextEra to deliver market-beating total returns, helping me reach my financial goals sooner. That's why I have been steadily buying more shares each month, which I intend on continuing in September.