Better Dividend Stock: NextEra Energy vs. Black Hills

The utility sector is changing. An increase in electricity demand is expected to drive faster growth for a sector traditionally seen as a slow-and-steady tortoise. That said, there are different ways to invest in the sector. Some might like historically growth-oriented companies like NextEra Energy (NYSE: NEE), while others may prefer a less exciting business like Black Hills (NYSE: BKH). Here's a comparison of both to help you decide.

NextEra Energy is two businesses in one

NextEra Energy owns one of the largest regulated utilities in the United States. Its Florida Power & Light operation has long benefited from in-migration to the state. Still, it is a slow and steadily growing business. The utility's real growth engine is its unregulated clean energy business. NextEra Energy has built this division into one of the world's largest producers of solar and wind power.

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That growth engine has supported impressive dividend growth of around 10% a year over the past decade. Management believes that growth rate will slow down over the next few years to settle at roughly 6%, which is still an attractive number. Add in a well above market 2.6% yield, and more conservative dividend growth investors should probably take a deep dive.

Black Hills is a more boring business

If you are a conservative investor, however, the unregulated clean energy side of NextEra Energy might worry you. That's where a utility like Black Hills comes in, since it is just a boring regulated utility. What sets it apart is its status as a Dividend King, one of just six utilities to have achieved it. And it has a relatively attractive 3.7% dividend yield, compared with the average utility's yield of around 2.6%.

Black Hills does actually come with its own risk, however, given that it is in the middle of a merger with NorthWestern Energy (NASDAQ: NWE). Shareholders have approved the deal, but it still requires regulatory approval. The merger, however, won't change the basic nature of the business, as both companies are fairly simple regulated utilities. It will just increase the scale and diversification of the combined company. It is still a worthwhile option for conservative investors looking for a high-yield utility stock.

What type of investor are you?

NextEra Energy and Black Hills are both well-run companies, but they are appropriate for very different investors. If you are looking for a dividend growth stock, NextEra Energy is likely a better fit. If you are simply looking for a reliable dividend-paying utility, Dividend King Black Hills is probably the one you should consider.

Reuben Gregg Brewer has positions in Black Hills. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.