I've learned a lot over my nearly two decades of investing. Two of the most influential lessons that have helped reframe my investing strategy are:
- Dividend growth stocks have historically outperformed non-payers, dividend cutters and eliminators, and companies with no change to their dividend policy.
- Taking a thematic investing approach to capitalize on long-term megatrends can yield outsize returns.
One company featuring both characteristics is NextEra Energy (NEE 1.22%). Because of that, I have been buying the dividend-paying energy company's shares as often as possible.
Powerful dividend growth
NextEra Energy recently increased its dividend by another 10%, continuing its steady upward climb. The utility has increased its payout each year for over two-and-a-half decades, growing it at a 9.8% compound annual rate over the last 15 years.
That steadily rising dividend has helped power superior performance. NextEra Energy has significantly outperformed the S&P 500 and S&P 500 Utility Index over the last three-, five-, 10-, and 15-year periods. For example, NextEra has generated an 18.1% average annual total return over the past decade, blowing past the S&P 500's 12.4% average annual return during that time frame.
NextEra Energy expects to continue growing its dividend. In addition to declaring its latest payment, the company reaffirmed its plan to target roughly 10% annual dividend growth through at least 2024 from 2022's base level.
The company's steadily rising earnings and conservative financial profile are powering that plan. NextEra Energy recently extended its earnings growth outlook through 2026.
A big factor driving that forecast is the accelerating demand for renewable energy that is supplying the company with a growing backlog of investment opportunities.
Meanwhile, NextEra Energy has a conservative dividend payout ratio and investment-grade balance sheet. Those features give it the financial flexibility to continue investing in expanding its portfolio while growing the dividend.
Plugged into a powerful long-term trend
A big driver of NextEra Energy's ability to grow its earnings and dividend is its focus on the decarbonization megatrend. The U.S. needs to invest an astounding amount of money over the coming decades to transition from carbon-emitting fossil fuels to cleaner alternatives.
As that slide showcases, the U.S. will need to invest $2 trillion in renewables and energy storage over the next 30 years to fully decarbonize the power sector. It would take double that investment rate to fully decarbonize the entire economy. As the global leader in producing power from the wind and sun and in energy storage, NextEra Energy is well-positioned to capitalize on this megatrend.
Meanwhile, the economics of investing in decarbonization initiatives have improved following the recent passage of the Inflation Reduction Act. NextEra Energy CEO John Ketchum called the landmark legislation "transformational for our industry and our business" on the fourth-quarter conference call. The CEO noted that the incentives support a broad array of renewable technologies and will be in place for a long time. Because of that, Ketchum said he "believe(s) that in this environment, low-cost renewables will help NextEra Energy...continue to drive long-term value for our customers and our shareholders."
These factors should enable NextEra Energy to continue growing its earnings at an above-average rate for years. That should allow it to keep increasing the dividend. These factors have the potential to power market-crushing total returns.
Two powerful return drivers
NextEra Energy has a long history of growing its dividend, which should continue. That puts it in a strong position to outperform. In addition, it's plugged into a powerful megatrend that should drive outsize earnings growth. That increases the probability it can deliver strong returns over the long term. Those dual return drivers are why I continue steadily buying more shares.