Utility Stock Showdown: Southern Company vs. NextEra Energy -- Which Is the Better Buy?

The truth is, Southern Company (NYSE: SO) and NextEra Energy (NYSE: NEE) are both well-run utilities. Investors wouldn't be making a mistake by buying either one. However, they are vastly different businesses, and that could change your choice as you look at these two giant U.S. regulated utility companies. Here's how to pick between them.

Southern Company is boring

A few years ago, Southern Company's stock was out of favor because it was experiencing significant delays and cost overruns on a major capital investment project. That is when I bought the stock, because I believed the nuclear power plants it was building would be a long-term positive despite their near-term negative impact. Wall Street, however, viewed the nuclear projects as a big risk.

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But decades of reliable, carbon-free base-load power was what Southern was really building. And that fits nicely with the company's fairly conservative business approach. This regulated utility doesn't take on massive risks. It really just focuses on the basics: providing reliable, low-cost power to customers and slow, steady growth for investors. That is highlighted in the fact that the dividend has been held steady or increased for 78 years, with increases in each of the last 24. The 3.1% yield is below where I bought in, but if you are looking for a boring dividend-paying utility, Southern should be on your short list now that those nuclear power plants are producing electricity.

NextEra Energy is leaning into clean power

NextEra Energy is actually a mix of two businesses in one. It owns a large regulated utility, and it operates one of the world's largest solar and wind businesses. The utility provides a reliable foundation, while the clean energy business is the company's growth engine. Combining these two businesses has worked very well for a long time, with dividends increasing annually for decades. However, the real story is dividend growth.

NextEra's dividend has grown at a compound annual rate of 10% over the past decade, compared with just 3% for Southern. That said, NextEra's expectation is that dividend growth will slow to 6% a year after 2026. With a 2.7% yield, investors are paying a premium for NextEra's higher dividend growth rate. But the real issue you need to consider is the risk associated with the unregulated clean energy business. There's no government-granted monopoly, leaving market prices to dictate revenue and earnings. That is a wildcard that conservative dividend investors may not want in their portfolios.

No wrong answers

As already noted, Southern and NextEra are both well-run companies. However, Southern is likely to be more appropriate for conservative dividend investors, while NextEra's clean energy business makes it more appropriate for more aggressive investors.

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