NextEra Energy (NEE -1.36%) is a giant U.S utility with a pretty impressive dividend history, having increased its payout annually for nearly three decades. And yet it's not your typical dividend-paying utility given that dividend growth has averaged a heady 10% per year over the past decade.
If you are a growth and income investor, NextEra Energy should be on your radar screen now. Here are two key reasons why.
1. NextEra Energy stock appears cheap today
The big reason to be attracted to NextEra Energy right now is its dividend yield, which is 3.2%. For income-focused investors, that will probably sound a bit low, because the average utility -- using Vanguard Utility ETF (NYSEMKT: VPU) as a proxy -- is offering up 3.6%. But most utilities don't grow their dividend by 10% per year; about half that figure is usually considered a solid number in the sector.
The more important fact to note here is that NextEra's 3.2% dividend yield is near its highest levels over the past decade. In other words, the stock looks historically cheap right now. To be fair, the utility sector is out of favor thanks to rising interest rates. The industry is capital-intensive and debt plays an important role in financing capital spending needs. Higher rates are a cost headwind. Most utilities will probably be cheaper than they have been in a long time. But given the rapid dividend growth NextEra Energy has offered, and the fact that management expects that growth to continue in 2024, a historically high yield is very attractive.
2. NextEra Energy's core-and-explore approach isn't broken
There is a nuance here that sets NextEra Energy apart from its peers. While it is one of the biggest utilities in the United States, operating largely in Florida via Florida Power & Light, it is also the largest producer of solar and wind power in the world. Roughly 70% of its business is made up of its regulated utility assets, which might be considered the "core." The rest is largely the renewable power business, which is best looked at as an "explore" opportunity. This combination of core and explore is what has produced the strong dividend and earnings growth NextEra Energy has rewarded investors with.
As noted above, the dividend should continue rising in 2024. But management is also quite positive about annual earnings growth, which it expects to land between 6% and 8% through at least 2026. That will be driven by slow and steady expansion in the core business, as Florida has long benefited from in-migration. Earnings should also be bolstered by increasing demand for clean energy, a sector that's unloved by Wall Street today but that still has massive growth prospects as the world transitions away from carbon fuels. It is a process that will likely take decades, providing NextEra Energy with a long runway for growth.
To add some color to the clean energy opportunity, according to the company, NextEra's clean energy business "had a record year of origination and continues to see strong demand for new renewables and storage." The division has a 20-gigawatt backlog of projects to complete, which is nearly four years' worth of work at the 2023 development run rate. Investors are presently downbeat on clean energy, but this business is clearly still a valuable growth engine for NextEra Energy.
Act while you still can on NextEra Energy stock
NextEra Energy isn't going to be right for every investor, with those looking to maximize the income they generate likely better off elsewhere. But for investors that appreciate growth or growth and income stocks, well, NextEra Energy looks cheap and still appears to have strong fundamentals. That's a combination that you shouldn't ignore because the buying opportunity here won't last forever.
