Geopolitical tensions have been high. Tariff uncertainty could also upend the economy and market. If you are worried about the future, then you'll probably want to buy a safe dividend stock. Perhaps one that, in years past, would have been recommended to widows and orphans. Namely a utility.
If you have $1,000 to invest, you'll likely find NextEra Energy (NEE 0.28%), Black Hills (BKH +0.03%), or Dominion Energy (D +0.45%) an attractive option. Each one has a safe business and an attractive dividend yield. But there's some key differences you'll want to understand before buying.
Image source: Getty Images.
Why invest $1,000 in a utility stock right now?
To be fair, $1,000 is a somewhat random figure. It could be $100,000 or $100. The key point here is that you have money you want to invest, but where? The world seems so uncertain at the moment. But there is one very certain thing, your modern life requires energy. And while you could live without power, you almost certainly don't want to.
Utilities are expensive to build and it would be nearly impossible to have two utilities serving the same customer base. So the government grants utilities monopolies in the areas they serve, but regulates the utilities, controlling the utility's rates and capital investment plans. The goal is to provide a balance between return and customer cost, which usually ends up leaving the utility with a slow and steady growth profile as a business.
These companies are not meant to be exciting, they are meant to provide customers with what is, basically, a life necessity while attracting investors with returns that are modest, but not insignificant. Dividends play a big role in those returns.
Just like in other industries, there are different dynamics to each utility stock. So you can't simply throw a dart and expect to pick a good one. The differences, meanwhile, mean there are utilities that will interest all different kinds of dividend investors. NextEra Energy, Black Hills, and Dominion Energy cover a lot of ground.
Why are these three utilities the best place to start?
NextEra Energy is a dividend growth stock. It has increased its dividend annually for more than three decades and, more to the point, the annualized dividend increase over the past decade was a huge 10%. The dividend yield, meanwhile, is roughly 3.2%, which happens to be slightly higher than the roughly 2.8% yield of the average utility. This is a high-yield dividend growth opportunity.
NYSE: NEE
Key Data Points
The core of NextEra's business is its regulated utility operation in Florida. But the real growth story is its renewable power business, which ranks among the largest in the world. Although the non-regulated renewable power business increases risk to some degree, NextEra uses long-term contracts that create reliable income streams.
If you like dividend growth, and believe that clean energy has a long runway for growth ahead, NextEra Energy could be right for your portfolio. A $1,000 investment would buy you around 13 shares.
NYSE: BKH
Key Data Points
Black Hills isn't nearly as exciting, operating regulated electric and natural gas assets in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. There's really nothing special about the business, though its customer base is growing nearly twice as fast as the overall U.S. population. That suggests that continued growth is highly likely as the utility invests to serve those customers.
Which brings up the big attraction here, Black Hills is a Dividend King with more than five decades of annual dividend increased behind it. And it offers an above average 4.8% yield. If you like large and reliable dividends, Black Hills could be for you. With $1,000 you can buy roughly 17 shares.
NYSE: D
Key Data Points
If you are a bit more adventurous you might want to look at Dominion Energy. This utility has a dividend yield of 4.9%. That said, the dividend isn't growing right now and it probably won't for a couple of years. This is because Dominion has been streamlining its business so that it is now largely just a regulated electric utility. It is currently working on strengthening its balance sheet and reducing its payout ratio so that it is more in-line with its utility peers. It is, basically, a utility turnaround story. What's notable is that the company's business is well situated to take advantage of big industry trends, including the fact that it operates in one of the largest data center markets in the world and that it is building a large offshore wind farm.
If you don't mind collecting a fat yield while you wait for dividend growth to resume, this could be a good choice. And when dividend growth does come back into play, it is highly likely that the market will afford Dominion a higher valuation. If you buy into Dominion's turnaround with $1,000, you will get roughly 18 shares.
Three "powerful" options for safe and reliable dividends
The caveat here is that utilities tend to be pretty boring investments. That's even true of Dominion Energy, despite it being a turnaround story. If you are looking for a reliable income stream, dividend grower NextEra, reliable dividend payer Black Hills, and even turnaround story Dominion could all find a place in your dividend portfolio today.
