There's no question that NextEra Energy (NEE 0.92%) is a well-run company. But that fact is so well known that investors have bid the shares up to levels that, likely, fully reflect the information. If you are trying to find a good mix of dividend income and dividend growth, you may want to consider buying WEC Energy (WEC 1.11%) instead of NextEra. Here's why.
NextEra Energy's value is fully priced in
NextEra Energy is a solid dividend growth utility, with a strong regulated utility core (largely Florida Power & Light) and a fast-growing renewable power operation. That combination has allowed the utility to increase dividends annually for three decades. But the real treat for investors is that the rate of dividend growth has been an attractive 10% a year over the past decade.
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Ten percent dividend growth for a utility, an industry known for being slow and boring, is incredible. Half that level would be considered a good number. Notably, management is calling for dividend growth of 10% a year through at least 2026, too, so this trend isn't expected to end. That figure is backed by an earnings growth projection of 6% to 8%. If you are a hard-core dividend growth investor it would be understandable if you wanted to buy NextEra Energy.
The problem is valuation. NextEra Energy's success and positive outlook are well known. That generally leaves the shares priced at a premium to the utility sector. For example, NextEra's dividend yield is currently around 2.6%. The average utility's, using Utilities Select Sector SPDR ETF as a proxy, is roughly 3%. That may not seem like a huge difference on an absolute basis, particularly when you consider the S&P 500 index's yield is a scant 1.2%, but it means collecting roughly 13% less income each year.
NYSE: NEE
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WEC Energy gives you more income
By comparison, WEC Energy is offering a 3.6% dividend yield today. That works out to 20% more than the average utility and 33% more than what you'd collect if you owned NextEra Energy. That sounds pretty attractive if you are trying to maximize the income your portfolio generates.
NYSE: WEC
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But what about dividend growth? WEC Energy hiked its dividend roughly 7% in January. It has increased its dividend annually for two decades. The average increase over the past decade has been around 7%. That's a bit slower than NextEra Energy, but the starting yield is so much higher that investors looking for a better mix of yield and dividend growth might find it more appealing.
That said, WEC Energy is not as large or diverse as NextEra. WEC provided natural gas and electricity to 4.7 million customers in parts of Wisconsin, Illinois, Michigan, and Minnesota. It is a far more boring utility, but it still has big plans. Its five-year capital spending goal is $23.7 billion and is expected to push earnings higher by 6.5% to 7% a year through 2028. If history is any guide, the dividend will grow roughly in line with earnings.
Once again, that's nearly as good as NextEra, but with a notably higher starting yield. And that's the big story here. NextEra is a great utility, but one that is usually fully priced. WEC Energy is a very good utility that appears to be trading at a more attractive level. Notably, the dividend yield, even after a recent stock rally, is still near the high end of WEC Energy's 10-year yield range.
WEC Energy is worth a closer look
Nobody would fault you for buying an industry leader like NextEra Energy. However, that doesn't mean it is the best option for all investors. If you are willing to accept a little less dividend growth potential for a utility with a still strong earnings growth profile and a much higher yield, you should put WEC Energy on your short list today. And if you already own NextEra Energy, consider augmenting that position with a new one in WEC Energy.
