As investors transition from their peak earning years to retirement, capital preservation becomes more important than growth. A time-tested place to park hard-earned savings is in blue chip dividend stocks.
Investing in equal parts of Union Pacific (UNP 0.99%), NextEra Energy (NEE 0.45%), and Essential Utilities (WTRG 0.80%) produces a dividend yield of only around 2.1%. However, each company makes up for its somewhat low yield with a proven track record for growing earnings and dividends over time. Here's what makes each stock a great buy now.
The best is yet to come for Union Pacific
Lee Samaha (Union Pacific): Owning your own infrastructure and operating as an effective duopoly in your core market is usually a good recipe for success. It's also a good combination for investors looking for a secure source of income. On top of that, Union Pacific also has a margin expansion opportunity from the ongoing implementation of precision scheduled railroading (PSR).
PSR is a set of management principles aiming to run the same amount of carloads but using fewer assets. Examples include running trains on fixed schedules on fixed routes rather than the previous hub-and-spoke model whereby carloads were delivered when the train was sufficiently full.
It's revolutionized the industry in recent years, and Union Pacific plans to reduce its operating costs as a share of revenue (known as the operating ratio) for many years to come -- even if it's struggling to do so now, given the current market conditions. Moreover, if you believe the U.S. economy will grow and physical goods and commodities will be needed to transport, then you think that Union Pacific has growth prospects. As such, given its market position on the West Coast, the railroad will be able to grow its dividend over the long term.
A shining example of growth and income
Daniel Foelber (NextEra Energy): It's hard to find a stock that is the complete package. But there's a case to be made that NextEra Energy gives dividend investors just about everything they could ask for.
For starters, NextEra Energy is a Dividend Aristocrat, having paid and raised its dividend for over 25 consecutive years. As a regulated electric utility, NextEra Energy generates stable cash flows, which support dividend raises and future growth projects. NextEra Energy also has a proven track record for evolving with the times. Over the last 35 years, NextEra has transitioned its electricity generation portfolio from majority oil and nuclear to natural gas, wind, and solar. Going forward, it plans to shift from natural gas to an increasingly solar-based portfolio that is ideally suited for its core customer base in Florida.
As an established leader in the energy transition, NextEra Energy is well positioned to invest in renewable energy projects and deliver its customers clean energy. One of the central qualities of a good dividend stock is the ability to support higher dividends over time. NextEra's multidecade plans chart a clear path toward growth. NextEra Energy also has a subsidiary, NextEra Energy Resources, that finances and operates clean power projects across the U.S. and Canada and then sells that electricity through power purchase agreements. So unlike some regulated electric utilities that simply produce and deliver electricity to their home base of customers, NextEra is also branching out and investing in other power projects.
Add it all up, and you have a nice blend of passive income from NextEra Energy stock's 1.9% dividend yield, reliable earnings and cash flows, and plenty of upside potential.
Wet your passive income whistle with Essential Utilities
Scott Levine (Essential Utilities): Choosing to supplement your retirement income with reliable dividend stocks is a great strategy. Taking it a step further and selecting a blue chip stock with a steady dividend? Now that's a golden approach to fortify your finances in your golden years. Opting for a leading utility stock like Essential Utilities and its forward dividend yield of 2.3% is an even more lustrous move to make.
One of the largest water utilities available to investors based on market capitalization, Essential Utilities provides water and wastewater as well as natural gas service to about 5 million people across 10 states. One of the most alluring features of Essential Utilities is that it derives the majority of its revenue from businesses in regulated markets. In 2021, for example, Essential Utilities reported that its regulated water segment and regulated natural gas segment accounted for 52.1% and 45.9%, respectively, of its operating revenue. This is advantageous for the company because business in the regulated markets is dependable. Utilities have to file with public utility commissions to implement rate increases for their customers; they can't arbitrarily raise rates. This contributes to management having good foresight into future cash flows, aiding them in planning for capital expenditures.
In simple terms, retirees are mostly interested in conservative, dependable investments like Essential Utilities. The company has a history that stretches back 135 years, and it recently celebrated 50 years on the New York Stock Exchange. While that track record is no guarantee of the company's future, it's certainly an encouraging sign.
Should Essential Utilities meet its 2022 guidance and distribute $1.148 per share, it will represent a 7% compound annual growth rate of the dividend since 2017. Management, moreover, expects to continue hiking the payout to shareholders consistent with a targeted (and conservative) payout ratio of 65%. For those in retirement yearning for a blue chip dividend stock, Essential Utilities seems like an investment worth dipping their toes in.
