NextEra Energy: The Power of Dividend Growth Over Yield

You can buy shares of NextEra Energy (NYSE: NEE) and collect a 2.7% yield. Or you could buy a rival such as Dominion Energy and collect a much fatter 4.7% yield. Both are large and fairly well-run utilities, but which one is the better dividend choice? The answer might very well be the stock with the lower yield. Here's why.

What does NextEra Energy do?

NextEra Energy is one of the largest utilities in the United States. Its core operations consist of regulated electric utilities in Florida, with Florida Power & Light being the largest. Florida has benefited for years from in-migration, which has meant more customers for NextEra Energy.

But it also means the utility has had to spend money to keep up with customer growth. Regulators are focused on ensuring that customers have reliable power, so they are generally happy to approve the spending needed to keep up with population growth.

Image source: Getty Images.

On top of this solid foundation, NextEra Energy has built one of the world's largest portfolios of solar and wind power assets. This division has benefited from the shift away from dirtier carbon fuels toward cleaner, renewable power options. There's likely to be a long runway of growth ahead, as well, since the power transition taking place is going to be a multi-decade effort.

This attractive combination of businesses is what supports NextEra's 2.7% dividend yield. But the real story here is that it is also what has supported the utility's 30-year streak of annual dividend increases. The average annualized dividend increase over the past decade was over 10%. That's a huge number for a utility, a sector in which low- to mid-single-digit dividend growth is considered good. The company expects 10% dividend increases to be made through at least 2026, as well.

Is it worth paying up for NextEra's dividend growth?

If you are looking to maximize the income your portfolio generates today, NextEra Energy probably isn't the right utility for you. After all, you can collect that 4.7% yield from a company like Dominion Energy. However, Dominion cut its dividend a few years back and it has put dividend increases on hold while it works to strengthen its balance sheet. Yes, you get a higher yield right now but you are giving up dividend growth.

What has dividend growth been worth at NextEra Energy? The highest price of NextEra Energy's stock in 2013 was roughly $22.45, adjusted for a 4-for-1 stock split in 2020. The dividend, also adjusted for the stock split, was $0.165 per share per quarter. So the dividend yield was 2.9%, slightly higher than the yield is today.

NEE data by YCharts

But the real magic comes when you fast forward to today. Right now the stock price is around $75 and the quarterly dividend is $0.515 per share. As noted, the yield is around 2.7%. But look at the difference in the stock price. The yield based on the purchase price in 2023 is a huge 9.1%! And the stock price is now more than 3 times higher as well since Wall Street rewarded the shares with higher prices as the dividend steadily rose.

Even if you just held the shares and did nothing else, you would now have huge capital gains and a much larger income stream.

There is more than one way to look at dividends

There's nothing wrong with focusing on current income and favoring stocks with high yields. But that isn't the only way to look at dividend stocks, with NextEra Energy's dividend growth showing clearly that it, too, can lead to an attractive income outcome over the long term.

In fact, for most dividend investors, it might make sense to own both high-yield stocks and dividend growth stocks in the same portfolio. The yield on purchase price for NextEra Energy looking back over the past decade or so is proof of that logic.

And if you don't need income now, but think you might want to live off of dividends in the future, well, a stock like NextEra Energy could be a powerful addition to your portfolio, particularly if you reinvest those dividends and let them compound over time.

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