If you put $10,000 into giant U.S. utility NextEra Energy (NEE 0.54%) one year ago, your position would only be worth around $9,250 today. The same investment in the average utility, using Vanguard Utilities Index ETF (VPU 0.64%) as a proxy, would be worth a bit more than $9,500, so NextEra Energy hasn't been the best near-term performer.
However, if you bought this stock for its dividend growth, one year just isn't long enough to really see the benefit of this company's growing business. Here's a look at what NextEra Energy has achieved for investors over the long term.
A tough year
There's no question that the last year has been difficult for most investors. Indeed, a $10,000 investment in an S&P 500 index ETF would have fallen in value to around $9,100. That makes NextEra's drop to $9,250 look like a relatively strong performance even though it still lags the $9,500 that you'd have left if you had put the same amount into the Vanguard Utilities Index ETF.
This spread, however, makes some sense, given that utilities are generally considered conservative investments and the fact that NextEra is a growth-oriented utility afforded a premium valuation by investors. In a tough market, you'd expect a growth-minded utility to experience a larger pullback than the sector average.
That said, utilities are generally considered income stocks. So to truly assess their performance, you need to look at their total returns, which include the reinvestment of dividends. Over the past year, a $10,000 investment in NextEra Energy would have turned into $9,450 based on total return. The stock's dividend yield is a modest 2.5% at today's share price. The total return value for the average utility would be $9,800 (with a dividend yield of 3.2%) and around $9,250 for the S&P 500 (with a smaller 1.6% yield).
Those are modestly better results for each of those investments, overall, but rank-wise, their order remains the same, with the average utility on top, NextEra slightly behind, and the S&P 500 bringing up the rear. Not shocking, given the yield spread.
NEE Total Return Price data by YCharts
This is where it becomes important to understand exactly what you own with NextEra Energy stock. This company is not your usual boring old utility. It has more of a growth orientation because it is both a regulated utility (owning Florida Power & Light) in a state that's benefiting from population growth, and it is also a clean energy operation that lays claim to being the largest producer of solar and wind power on the planet. The robust growth this combination translated into impressive, long-term dividend growth.
Some additional numbers
Over the past year, NextEra Energy management increased the dividend by 10%. Over the past three years, it hiked it at an annualized rate of roughly 10%. Over the past five years, dividend growth averaged a little above 10%. And over the past decade, annualized dividend growth was around (you probably guessed it) 10%. That's not only an impressive amount of consistency, but it is also quite a material payout growth for a utility. In total, over the past 10 years, the dividend has increased by over 150%. The stock price has risen along with the payout.
So it's pretty clear why dividend growth investors might want to own NextEra Energy stock. But it should also be obvious why one year isn't enough to see the benefits of its long-term dividend growth opportunity. Management doesn't expect a big drop off, with projections that call for the dividend to grow by (surprise!) 10% a year through at least 2024. The company is projecting adjusted earnings-per-share growth of between 6% and 8% a year through 2026.
While past performance is no guarantee of future results, it pays to look backward to see just how shareholders benefited from NextEra Energy's ability to successfully execute its growth plan. A $10,000 investment in NextEra Energy a decade ago would today be worth nearly $41,000. If you reinvested dividends, that value would increase to $53,000.
That compares incredibly favorably to the results you'd achieve with an investment in Vanguard Utilities Index ETF, where a $10,000 investment would now be worth about $17,700, or nearly $24,500 if you reinvested dividends. NextEra Energy also bested the S&P 500 over that span -- a $10,000 investment in the index a decade ago would have grown to roughly $25,500 today, or, with dividends reinvested, $30,500.
Don't get discouraged
The utility's next decade is likely to differ in some significant ways from the past one. Higher interest rates and inflation are making the capital investment projects that underpin the company's growth projections more expensive. Still, given its past success as an investment, it's best to think about the long term and not get too caught up in short-term share price gyrations. NextEra Energy's growth plans remain robust, and one weak year or so for the stock price doesn't necessarily change that. If management can meet its growth goals, NextEra Energy should remain a rewarding long-term holding for dividend growth investors.
