Utilities are conservative income stocks with a reputation for being safe enough to be appropriate for widows and orphans. That’s true for some utilities, but NextEra Energy(NYSE: NEE) bucks the trend (in a good way). While NextEra operates a boring utility, it also owns a rapidly growing renewable power business.
For both growth and income and dividend growth investors, it’s a great stock to consider. And now is a unique opportunity to buy it. Here’s what you need to know.
NextEra is down but not out
NextEra Energy’s dividend yield is around 3.5%. That’s basically in line with the utility average, using Vanguard Utilities Index ETF as an industry proxy. While income-focused investors might see NextEra’s yield as modest, it’s important to note that the 3.5% yield is near the highest levels of the past decade. So in this way, the stock looks historically cheap right now.
NEE Chart
That said, management expects to increase the dividend by roughly 10% in 2024, which is both attractive on an absolute level and extremely high for a utility. But that’s right in line with the rate of dividend growth over the past decade. The dividend has been increased annually for 29 years, so an increase in 2024 would bring that record up to a cool three decades. NextEra Energy is a dividend growth machine, and there’s no reason to think that the growth is going to come to a halt anytime soon.
Notably, management projects earnings growth of between 6% and 8% a year through 2026. There’s a chance that dividend growth will slow down and simply track along with earnings growth, but even that would suggest an attractive dividend growth rate. This is particularly true of a utility stock.
That’s notable because dividend growth investors and growth and income investors looking to create a diversified portfolio will probably find it hard to add utility exposure. Most stocks in the sector are simply slow-growing on the earnings and dividend fronts. NextEra Energy’s historically high yield and robust growth outlook make the stock an ideal diversification pick for investors looking for something with a little more growth.
Why is NextEra’s yield historically high?
The really big reason for NextEra’s high yield is that interest rates have risen. There are two issues for investors to consider here. First, other income options are now more competitive, like certificates of deposit. Second, and more importantly, higher interest rates will make it more expensive for NextEra to grow its business. The utility sector is capital-intensive and makes heavy use of leverage. Don’t get too worried about this.
There are two distinct businesses here to consider. First, NextEra owns Florida Power & Light, which is the largest regulated utility in Florida and about 70% of the utility’s business. The Sunshine State has benefited from population growth for years. More customers mean more revenue and more opportunity to invest in regulated assets. This is a very stable and reliable business, because NextEra has been granted a monopoly in exchange for accepting government oversight of the rates it charges and its capital investment plans. Regulators generally adjust so that utilities can earn a reliable return. Thus, it’s highly likely that the rates NextEra can charge will eventually be updated to account for higher interest rates.
The rest of NextEra is NextEra Energy Resources, one of the largest renewable power generators in the world. This is a fast-growing business with a very long runway for growth as carbon-heavy power sources get replaced by renewable sources like solar and wind. NextEra currently operates around 34 gigawatts of clean energy. It has plans to add as much as 41.8 gigawatts to that total by 2026. This side of the business is not regulated, so higher interest rates will have to be dealt with on a contract-by-contract basis. Market forces are likely to ensure NextEra can profitably grow this side of its business even if there’s some near-term disruption to deal with.
In all, higher interest rates are a headwind. But they’re highly unlikely to change the long-term growth trajectory of NextEra and its dividend.
Don’t miss out on the opportunity
There’s no such thing as a perfect investment, but the current concerns about NextEra’s growth seem likely to be temporary and, perhaps, a little overblown. That’s an opportunity for investors that think in decades. Growth-and-income and dividend growth-focused investors have the chance to add a reliable utility stock to their portfolios with a historically attractive yield. That’s not something you should pass up without giving NextEra a deep dive.
Should you invest $1,000 in NextEra Energy right now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
