The energy industry is transitioning from fossil fuels to cleaner alternative energy sources. It will take an estimated $4 trillion of investment to fully decarbonize the U.S. economy by 2050. Because of that, companies focused on this opportunity should be able to grow their earnings and dividends at attractive rates.
NextEra Energy (NEE 0.54%) is leading this charge. That makes the utility stand out as the best dividend stock for those seeking passive income over the next decade from the energy sector.
A rock-solid passive income stream
NextEra Energy's dividend currently yields about 2%, which is slightly higher than the roughly 1.7% dividend yield of the S&P 500. The clean energy-focused utility can easily support that above-average payout.
The company generates very stable revenue. Its Florida electric utility, FPL, produces steady earnings backed by government-regulated rate structures. Meanwhile, its energy resources subsidiary earns predictable income from long-term power purchase agreements (PPAs) for the electricity produced by its wind- and solar-generating facilities. Finally, the company collects management fees and dividend income from its affiliate, NextEra Energy Partners (NEP 2.99%).
NextEra pays a conservative portion of its steady earnings via its dividend. The company has a dividend payout ratio of around 60%, below the utility sector's 65% average. NextEra also has a top-tier balance sheet with A-rated credit and low leverage ratios. Finally, its relationship with NextEra Energy Partners provides it additional financial flexibility. The company can steadily drop down assets to that entity, enabling it to recycle capital into new investments.
These factors put the company's dividend on a very sustainable foundation.
Powerful dividend growth ahead
NextEra Energy also has a long history of growing its payout. The company has increased it for over 25 straight years, growing it at a 9.8% compound annual rate since 2006.
The company expects to grow its dividend by around 10% annually through at least 2024. Powering that view is the $85 billion to $95 billion of capital projects the company expects to complete through 2025. These projects include continued decarbonization and modernization investments at FPL and additional renewable energy capacity within energy resources. The company also plans to build a national water utility and invest in natural gas and electricity transmission projects. These investments should grow its adjusted earnings per share at around 10% annually through 2025 at the high end of its forecast, with operating cash flow growth at or above that level.
On top of that, the company has ample long-term growth opportunities. It unveiled its real zero strategy last year, which should power growth for the next couple of decades. FPL expects to deploy hundreds of millions of solar panels over the coming years, along with a significant expansion of its battery storage capacity. That company also expects to replace natural gas in its existing power plants with renewable natural gas and green hydrogen. Meanwhile, its energy resources segment expects to continue developing renewable energy capacity and other infrastructure to help decarbonize the U.S. power sector and industrial economy in the coming years.
These investments should enable NextEra Energy to grow its earnings over the next decade, supporting continued dividend growth.
An excellent passive income producer
NextEra Energy offers investors an above-average-yielding dividend that it should have no problem sustaining during the energy transition. That's because the company has a strong financial profile and tremendous growth prospects as it continues expanding its Florida utility and energy resources segment. Those factors should also allow it to continue increasing its payout at a high rate. That combination of security and growth makes NextEra stand out as one of the best passive-income stocks in the energy sector over the coming decade.
