Dividend Aristocrats are great stocks to own if you're seeking a steadily rising passive income stream. These S&P 500 members have demonstrated the sustainability of their dividends by increasing them for more than 25 straight years. While past success is no guarantee of future results, many Dividend Aristocrats have the financial strength to continue growing their dividends in the future.
One seemingly unstoppable Dividend Aristocrat is NextEra Energy (NEE 0.51%). The clean-energy-focused utility expects to continue growing its dividend at a healthy rate for the next several years, powered by its renewable energy investments. Here's a closer look at this excellent passive-income stock.
Powerful dividend growth
Some Dividend Aristocrats will give their investors a token raise each year to maintain their streak. While that's better than nothing, it might not be enough to offset inflation. On the other hand, NextEra Energy has historically given investors inflation-beating annual dividend increases.
For 2022, NextEra Energy boosted its dividend payment by about 10%, which is well above the red-hot inflation rate over the past year. That continued a long streak of healthy dividend increases by the company. Since 2006, NextEra Energy has grown its payout at a 9.8% compound annual rate. That's well above the rate of most other utilities and companies in the S&P 500. It has helped contribute to the company's significant outperformance compared to those two groups during that time frame.
The fuel to continue growing the dividend
NextEra Energy expects to continue growing its dividend at an above-average rate in the coming years. The utility set a target to increase it by roughly 10% per share through at least 2024. That's an impressive pace for a company offering an above-average dividend yield (currently at 1.9% versus 1.6% for the S&P 500). Several factors help power that outlook.
It all starts with the company's firm financial foundation. The utility generates stable earnings backed by steady demand for the electricity and gas it distributes to customers under government-regulated rate structures or long-term fixed-rate contracts. Meanwhile, the company pays out a conservative amount of its earnings via the dividend. Its dividend payout ratio was 60% at the end of 2021, below the peer group average of 65%. That gives it a larger margin of safety and allows it to retain more cash to fund expansion. NextEra Energy also has a strong credit rating, giving it greater access to lower-cost capital.
Further enhancing the company's financial flexibility is its strategic relationship with NextEra Energy Partners (NEP -1.49%). NextEra formed that entity to acquire and operate clean energy infrastructure and uses the company to recycle capital. NextEra sells income-producing clean energy infrastructure to the partnership, giving it funds to invest in new developments. Meanwhile, these deals give NextEra Energy Partners the cash flow to grow its high-yielding dividend.
The company's capital sources will allow it to invest $85 billion to $95 billion between 2022 and 2025 on expanding its Florida-based utility and energy resources segment. The company anticipates these investments will grow its adjusted earnings per share by a roughly 10% compound annual growth rate at the high end of its guidance ranges through 2025. That's a potential acceleration from the 8.4% compound annual growth rate in adjusted earnings per share it has delivered since 2006. Meanwhile, the company sees operating cash flow growing at or above that level. That supports its plan to increase the dividend by around a 10% annual rate over the next few years.
Meanwhile, the company has plenty more growth ahead. It launched its ambitious Real Zero strategy in 2022 to eliminate carbon emissions from its operations by 2045. That plan would see the company's Florida-based utility install hundreds of millions of solar panels, add massive battery storage capacity, and replace natural gas with renewable natural gas and green hydrogen. Meanwhile, its energy resources segment aims to lead the decarbonization of the U.S. economy. The $4 trillion market opportunity would see the company continue developing wind, solar, battery storage, and electricity transmission capacity. These massive investments should help drive steady earnings growth, likely giving NextEra Energy the power to continue growing its dividend for years to come.
The Dividend Aristocrat looks unstoppable
NextEra Energy offers an above-average yield that it expects to grow at a sizable rate for the next several years. Meanwhile, it should have plenty of power to continue growing that payout in the future. That makes it an excellent dividend stock for passive income seekers as it should be able to provide them with an inflation-beating income stream.
