NextEra Energy (NEE 0.48%) is one of the largest utility stocks you can buy, with a huge $150 billion market cap. But that market cap is really a function of the stock's popularity on Wall Street, which has left it with a somewhat miserly dividend yield of 2.8%. The average utility's yield is 3%, using Utilities Select Sector SPDR ETF as an industry proxy. You can do better than that if you want to maximize the passive income your portfolio generates. And you can do it with a Dividend King utility!
NextEra Energy: Credit where credit is due
In no way should investors think that NextEra Energy is a bad company. Quite the contrary, it is probably one of the best-run utilities you can buy. The problem is that this fact is fairly well known. For years, NextEra Energy has grown its business rapidly using a two-pronged approach, mixing a regulated utility (Florida Power & Light) and a renewable-power business. The regulated utility is the foundation, while the clean energy operation is the growth engine.
The real attraction here isn't the yield; it's the growth. That's shown up most notably on the dividend front, with a 10-year annualized dividend-increase rate of roughly 10%. That's good for any company but pretty incredible for a utility. Half that rate would be a good number for the slow and steady utility sector. If you are a dividend-growth investor or a growth and income investor, NextEra Energy should probably be on your short list. But income investors will be better off looking elsewhere for yield.
Black Hills is a Dividend King
One of the places where you should probably start your search is with utilities that have proven they can provide reliable income streams. Dividend King Black Hills (BKH 1.14%) will quickly pop up on your radar since it is only one of a handful of utilities with 50+ annual dividend increases behind it. And it has a dividend yield of nearly 5%, which is way better than what NextEra Energy is offering but also higher than average for a utility. As for dividend growth, Black Hills has an annualized-increase rate of 5% or so over the past decade. That's still pretty good even though it doesn't match up to what NextEra Energy has achieved.
That said, Black Hills is a much smaller utility, with a market cap of just $3.6 billion. It serves 1.3 million natural gas and electric utility customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Its customer count is growing nearly three times as fast as population growth in the United States, so it, too, has a solid business foundation.
The problem is that Black Hills has a fairly heavy debt load. Rising interest rates have increased the company's costs and put pressure on earnings. It pulled back on its capital-investment plan in 2023 specifically so it could pay down debt. Still, higher rates will remain a headwind over the near term. Over the long term, though, regulators are likely to take into account higher-interest expenses when they approve the company's rates and investment plans. So, over time, this headwind should subside. In the meantime, you have a chance to buy a Dividend King utility with a very attractive dividend yield.
How attractive is Black Hills' yield?
NextEra Energy is a great company and an attractive stock for the right type of investor. If that investment shoe doesn't fit here, you'll want to look elsewhere. For income investors, a good option will be reliable dividend payer Black Hills. But one last takeaway is worth considering: Black Hills' dividend yield is near its highest levels of the past decade. That means it looks historically attractive if you appreciate big passive-income streams.
