The utility sector has dramatically underperformed the S&P 500 index over the past year, trailing the broader market by over 15 percentage points. Higher interest rates are a big part of the story since utilities generally make heavy use of debt to fund their businesses. But the sector is home to a lot of reliable dividend stocks.
You might want to take a closer look at NextEra Energy (NEE +1.21%), Brookfield Renewable (BEP 2.11%) (BEPC +0.00%), and Dominion Energy (D +0.59%) in July while Wall Street is still in a dour mood and yields in the sector are still lofty.
NextEra Energy is a dividend growth machine
NextEra Energy has increased its dividend annually for three decades and counting. That's a pretty compelling streak, but it isn't the best out there. In fact, there are a handful of utilities that have achieved Dividend King status. Where NextEra Energy stands out is dividend growth, with the trailing annualized dividend increase over the past decade at a huge 10% or so. That figure is 10% over the trailing three- and five-year periods, too. And management is projecting 10% dividend growth through at least 2026, so the streak of huge dividend growth isn't over yet.
10% dividend growth is good for any company, and it's really good for a utility. How does NextEra achieve this? It has a slow and steadily growing regulated utility business on top of which it has built one of the largest renewable power businesses in the world. The latter business is the growth engine, and given the global shift toward cleaner energy sources, the runway for growth seems likely to be long.
The problem with NextEra Energy is that investors know just how well run the company is and have priced it accordingly. The yield is below average for a utility at 2.9%. But if you are a dividend growth investor, this is probably the utility stock you'll want to own.
NYSE: NEE
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Brookfield Renewable is laser-focused on clean power
If you like the notion of investing in clean energy but are looking for more yield than NextEra Energy has to offer, you should consider Brookfield Renewable. This isn't technically a utility, but it owns clean energy assets around the world and deserves your attention given its huge 5% or 5.7% yield. Why are there two yields? Because there are two share options, one structured as a partnership and one as a traditional corporation.
NYSE: BEP
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Both Brookfield Renewable Partners and Brookfield Renewable Corporation represent the same entity. The only difference is in the demand among investors for each share type. The partnership is a bit more complicated in that it comes with a K-1 form that has to be dealt with come tax time. But it is not a master limited partnership, so it can still be owned in a tax-advantaged retirement account.
If you are trying to maximize your passive income stream, Brookfield Renewable Partners is a strong option. If you don't want to bother with the K-1, a 5% yield is still pretty attractive. Either way, you still get a globally diversified portfolio of clean energy assets.
NYSE: BEPC
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But, more importantly, you get to invest alongside Brookfield Asset Management (BAM +0.00%), which oversees Brookfield Renewable. Brookfield Asset Management has decades of experience and is a well-respected infrastructure investor. You could do much worse than partnering with this company by adding high-yield Brookfield Renewable to your portfolio.
Dominion Energy is on the mend
The last option on this list is a turnaround story in the form of Dominion Energy. As just a simple regulated utility, it has gone through a major business overhaul over the past decade or so. The most recent review has resulted in large non-core assets being sold (including three regulated natural gas utilities) so that the company can pay down debt, lower its payout ratio, and focus on its reasonably well-positioned regulated electricity operations.
NYSE: D
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The dividend yield is currently around 5.4% today, but the dividend isn't going to grow until the payout ratio is in line with the industry average, which will probably take a few years. However, given the yield, investors are being paid well to wait. After that point, the dividend should grow in line with earnings, which the company believes can expand between 5% and 7% a year. Notably, Dominion operates in one of the fastest-growing data center markets in the world, which should help to spur demand for power in its region.
There's still time, but don't wait too long
Utility stocks are largely out of favor today as Wall Street worries about the long-term effect of higher interest rates. While interest rates are a headwind, the sector will adjust to the change over time, just like it has during past rate change cycles. If you can stomach stepping in when others are fearful, buying now while the news is bad could lead to strong returns over the long term. And three good places to start in the utility space are NextEra Energy, Brookfield Renewable, and Dominion Energy.
