Building and maintaining power plants is expensive, which is why utilities often carry a lot of debt. That's been a problem on Wall Street because investors are worried that the swift rise in interest rates will dent utility earnings. Thus, the utility sector has been out of favor. That's great news for long-term investors, even if all you have to invest is $500, because you can buy great companies at reasonable -- if not cheap -- prices.
The list includes utility giant NextEra Energy (NEE -1.36%) and relatively small Black Hills (BKH -0.63%), which happens to be a Dividend King. Here's what you need to know about these two utility stocks.
1. NextEra is a 2-in-1 play
The core of NextEra Energy's business is Florida Power & Light, the largest electric utility in the Sunshine State. This has been a very good region in which to operate because of the long-term migration patterns toward warmer climates, which has resulted in an increased customer base. Simply put, more customers means more revenue.
However, the really interesting story here isn't the company's regulated electric utility operations. What sets NextEra apart from its peers is its massive clean energy business, which is among the largest in the world. This has been a long-term growth engine. That shows up most compellingly in the dividend, which has been increased at an annualized rate of 10% for a decade. Half of that rate would be considered very good for a utility. The company expects 10% dividend growth in 2024 and continued solid earnings expansion through at least 2026.
The problem with NextEra is that investors are well aware that its mix of regulated assets and clean energy growth is producing strong results. The shares are usually afforded a premium valuation. But given the rise in interest rates, NextEra's stock has pulled back. The 3.6% dividend yield on offer today is only average for a utility, but it is near the highest levels of the past decade for NextEra Energy. In other words, this strong performer looks like it is on sale.
NEE Dividend Yield data by YCharts
2. Black Hills is small but mighty
There's another impressive thing about the $117 billion market cap of NextEra Energy: It has increased its dividend annually for 29 consecutive years. Black Hills is a way smaller company, with a market cap of just $3.5 billion. However, Black Hills has boosted its dividend annually for 53 consecutive years. That's right, this tiny little utility is a highly elite Dividend King, which kind of puts it on a plateau above NextEra in some ways.
But like NextEra, investors are worried about the impact of higher rates. So Black Hills' roughly 5% yield is near decade highs as well, suggesting that it is also on sale today.
Black Hills operates in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming, serving roughly 1.3 million natural gas and electric utility customers. While that may sound less attractive than Florida, the regions in which Black Hills operates have actually seen customer growth that is nearly three times faster than U.S. population expansion. Higher interest rates are likely to be a headwind, but given the strong underlying business, Black Hills should muddle through just fine despite its diminutive size and continue to reward dividend investors all along the way.
You win, big or small
The big takeaway here is that dividend growth investors have an opportunity to buy a strong utility in giant NextEra Energy. Investors looking for a reliable high yield have an opportunity to buy a strong utility in tiny Black Hills. Both can be had for less than $500 a share, so you can buy these two stocks even if you are starting with a modest amount of cash.
