Utilities aren't exactly exciting, most of the time, but they tend to be fairly reliable dividend stocks. In other words, they can provide a solid foundation for a diversified portfolio. As the new year gets underway, you might want to examine NextEra Energy (NEE +1.21%), Black Hills Corporation (BKH +2.56%), and Dominion Energy (D +0.59%) before January is over.
NextEra is a dividend growth machine
If there is one thing that sets NextEra Energy apart from its peers, it is robust dividend growth. Over the past decade, the annualized dividend growth rate for this utility was a huge 10%. That would be a good number for any company, but for a utility it is shockingly strong. Management believes it can continue to grow the dividend at 10% through at least 2024. Earnings are projected to increase at between 6% and 8% a year through at least 2026.
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There are actually two good stories here. The first accounts for roughly 70% of the business, and that's NextEra's regulated utility operations in Florida, a state that has long benefited from in-migration. More people means more revenue and more need for the capital investments that help justify higher rates to regulators. Slow and steady is the story here.
The second story, roughly 30% of the business, is the company's clean energy business, which is one of the largest producers of solar and wind power in the world. This business is the growth engine, with the company expecting to roughly double its capacity by 2026.
NEE Dividend Yield data by YCharts
If you are a dividend growth investor, this is a utility you'll want to own. And the roughly 3% yield is near the highest levels of the past decade, suggesting it is on sale today.
Black Hills just keeps paying
The next utility on this list is far less exciting, but that's actually a selling point for the stock. Black Hills is a relatively small utility providing electricity and natural gas to 1.3 million customers in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. The customer base in the regions it serves is growing at nearly three times the rate of the population growth in the United States. That's why slow and steady has been the core story here for a very long time.
How long? Well, Black Hills is a Dividend King with 53 consecutive years of annual dividend growth under its belt. That's among the longest streaks of any utility. The average annualized growth rate over the past decade was roughly 5%, which isn't nearly as impressive as NextEra Energy but is still a very solid number. If you are the type of dividend investor focused on dividend consistency, you need to look at Black Hills. And, like NextEra, Black Hills' dividend yield, at around 4.6%, is near its highest levels of the past decade.
Dominion Energy is almost done
Dominion Energy is a contrarian pick for those who like a bit of a turnaround story. After selling most of its pipeline assets a few years ago, the utility cut its dividend. But it promised investors that it would get right back on the dividend growth path. Then it announced another business review that would see it sell more assets and refocus around its electricity business.
The dividend won't be increased in the near term (falling short of a prior commitment), but management expects to maintain the current payment. All this explains why the stock yields a hefty 5.6% today, well above the utility average of roughly 3.4%, using Vanguard Utilities ETF (VPU +0.98%) as a proxy.
NYSE: D
Key Data Points
The good news is that Dominion's review is nearly complete, with just one more major step (finding a partner for a large offshore wind project it is working on). That means the company can start looking to a brighter future (again). On the dividend front, the goal is to grow earnings so that the payout ratio falls from an above-peer level back into the peer range. It could take a couple of years to achieve this, but investors will be collecting an above-peer yield along the way, so there's a positive trade-off here to go along with the negative.
Although it's not for everyone, Dominion might be a good addition for investors who like trying to find a diamond in the rough. Assuming there are no further business changes (there's not much else to change at this point), a return to dividend growth is the long-term goal here.
A utility for just about everyone
The utility sector is broad and varied. NextEra, Black Hills, and Dominion are just three companies. But they cover a lot of ground, including dividend growth, dividend consistency, and a bit of a turnaround story. If you take the time to dig into this trio, it is highly likely that you'll want to add at least one of these utilities to your portfolio in January.
