NextEra Energy (NEE 0.34%) is a bellwether name in the utility sector, with an incredible string of dividend hikes and a huge 380% stock advance over the past decade. Duke Energy (DUK 1.51%) is also a utility giant. Its dividend history is solid, but its stock has lagged well behind that of NextEra Energy, up only 61% over the past 10 years. For a time Duke tried to be more like NextEra, but management decided recently that's not worth the risk anymore. Here's what you need to know.
Two companies in one
NextEra Energy owns Florida Power & Light, one of the largest regulated utility businesses in the United States. It is in an advantaged market, given that the state of Florida has been attracting residents with warm weather and low taxes for years. Still, regulated power businesses are generally slow-growth enterprises. Notably, they have monopolies, but key business decisions, like capital investment plans and price increases, have to be approved by the government.
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This business isn't why investors like NextEra Energy's stock so much. The regulated operation is "just" the reliable foundation on which NextEra has built one of the largest non-regulated solar and wind power operations on the planet. It has huge growth plans for its clean energy operation, with management hoping to more than double its power capacity by 2025. The growth opportunity this offers is one of the key reasons why investors have bid the stock up to the point where NextEra's dividend yield is a miserly 2%. For comparison, the average utility dividend yield, using Vanguard Utilities Index ETF as a proxy, is nearly 2.9%.
Duke Energy's dividend yield is 3.9%, notably higher than both the average utility and NextEra. Duke's electric utility and natural gas distribution operations span seven states. While largely in decent markets, it is not as well positioned as NextEra with its Florida utility. And Duke Energy's non-regulated renewable operations make up less than 5% of its business. It simply hasn't been as aggressively focused on clean energy growth as NextEra at a time when investors looked favorably on the clean energy space.
Now what?
Duke is about to change things up in a material way, but it isn't going to try to be more like NextEra. In fact, it is looking to jettison its non-regulated clean energy business so it can be even less like NextEra. That will make Duke an even more boring utility. Does that make sense?
Building non-regulated renewable power assets has become increasingly competitive, something that Duke's peer Southern Company has previously noted. Higher risk and lower returns are the result, which is hard for a utility to justify if it lacks the massive scale of NextEra Energy in the space. So Duke chose to double down on its core.
That, however, doesn't mean it lacks growth or that it isn't investing in clean energy. In fact, the company believes that it has more opportunity to profitably invest in clean energy assets within its regulated business than it would have in the non-regulated arena. In fact, management believes it can still grow earnings between 5% and 7% over the long term without the non-regulated clean energy operation. Dividend growth is likely to lag behind that somewhat, perhaps in the low- to mid-single digits, but the payment looks set to keep increasing. This move will likely result in Duke being an even more reliable dividend stock for income investors.
Taking a different path
NextEra achieved great success on the dividend front, growing its dividend at a compound annual clip of 10% over the past decade. It's an attractive dividend growth stock, though investors clearly know this given the impressive stock returns. Duke just isn't that company, which isn't a bad thing. In fact, it is planning to exit the non-regulated clean energy business. True, Duke's dividend growth over the past decade has only been around 3% a year, but given its notably higher yield and increasingly conservative approach, that might be just what you are looking for if you want to maximize your passive income stream today without having to take on big risks.
