NextEra Energy (NEE 1.07%) isn't your typical utility stock because its business contains two very different divisions. One provides a strong foundation, and the other provides rapid growth.
The combination has made NextEra Energy a dividend growth standout in the typically slow-growth utility sector. Here's what you need to know about NextEra and why this dividend growth stock is so attractive right now.
NextEra Energy is historically cheap
NextEra Energy's dividend yield is around 3.3% today. That's a touch below the industry average of 3.5%, using the Vanguard Utilities ETF as a proxy.
But NextEra is usually afforded a premium to its peers (more on this below). That 3.3% dividend yield just happens to be near the company's highest levels over the past decade, suggesting that the stock is on sale.
NEE Dividend Yield data by YCharts.
Adding to the allure, NextEra Energy has increased its dividend annually for 29 consecutive years. So there's a very real commitment to returning value to shareholders via reliable dividend growth.
But that brings up the key metric in this story: NextEra Energy's dividend has grown at an annualized rate of 10% over the past decade. That is why the stock is afforded a premium price since half that rate would be considered very good in the utility sector.
Put simply, NextEra Energy is a dividend growth machine and looks cheap today. But why? Perhaps something has changed.
NextEra is still projecting big dividend growth ahead
The truth is that something material has changed in the utility sector. Interest rates have risen dramatically over the past couple of years, and that will make it more expensive for utilities to operate their businesses.
Don't get too caught up in that -- NextEra Energy is projecting 10% dividend growth through at least 2026. There are some important facts to know here.
First, NextEra Energy is two businesses in one. The core operation -- about 70% of the company -- is its regulated utility operation. This division largely consists of Florida Power & Light, one of the largest utilities in the United States, which has long benefited from net migration to the Sunshine State. More customers mean more revenue, and the customer trends are not likely to change anytime soon.
As for higher costs, regulators are likely to consider rising interest rates when they contemplate NextEra Energy's requests for rate increases and capital-spending approvals. Maybe there'll be a short-term effect, but in the long term, higher rates shouldn't materially alter the dynamics.
NYSE: NEE
Key Data Points
The remaining 30% of NextEra Energy's business is its fast-growing renewable-power operation. The contracts it signs here are market-based, so they, too, will adjust along with interest rates.
But the real story is growth, with NextEra Energy hoping to roughly double its energy capacity in this division by 2026. In other words, more growth is the expected outcome, and that should further support the strong dividend growth that management is projecting.
The big picture is that, despite rising interest rates, NextEra Energy doesn't see much changing in its long-term prospects. That's opening up an opportunity for dividend growth investors to buy this dividend growth gem while it appears to be on the sale rack.
A unique buying opportunity
NextEra Energy isn't going to be for every investor. If you're seeking high-yield stocks, for example, you should probably keep looking.
But if you're a dividend growth investor or even a growth and income investor, NextEra Energy looks like a very attractive option today. It's not your typical utility, for sure -- but that's exactly why you should find the company and its 10% dividend growth rate so alluring.
