Over the past three months, the average utility stock in the S&P 500 index has gained around 10% using Utilities Select Sector SPDR ETF as an industry proxy. That compares to a roughly 6% advance for the broader S&P 500 Index. But NextEra Energy (NEE 0.48%) gained more than 20% over the same period, which is nothing short of impressive.
Have you missed out? Maybe, but it depends on your investment goals.
NextEra Energy isn't a boring utility
Historically, utilities were considered so safe that even widows and orphans could feel comfortable owning them. While NextEra Energy probably shouldn't be looked at as a risky company, it does things a bit differently from your average utility. About 70% of the business is tied to a boring old regulated utility, Florida Power & Light (FP&L). The rest of business is its fast-growing renewable power operation.
FP&L is a particularly well-positioned regulated utility. The state of Florida has benefited from net migration for years as people move to lower-tax states, especially ones with warmer climates. More customers help boost growth since it means more people to buy electricity.
But more customers also help NextEra in other ways, as it means there's more need for capital investments and more reason for regulators to approve the company's spending and rate requests. So NextEra's foundational business is an advantaged one.
The real differentiator here, however, has been management's ability to use that strong foundation to build one of the world's largest solar and wind power companies. It's positioned to continue growing, too, with management hoping to more than double its capacity by the end of 2027. Growth is the name of the game for NextEra Energy.
Investors know how good NextEra is at growing
All in, NextEra Energy will tick off a lot of boxes for investors. That includes dividend-growth investors who'll note that the company's dividend has been increased at an annual rate of 10% over the past decade.
That's a pretty impressive number for any company, let alone a utility. And management believes that its target of 6% to 8% annual earnings growth through 2027 will allow it to increase the dividend at 10% a year through at least 2026.
If you're a dividend-growth investor or a growth and income investor, you'll want to take a look at NextEra Energy. The problem, however, is the massive stock advances over a very short period of time. The price increase is really just a rebound after a steep price decline following a swift rise in interest rates.
Still, NextEra went from a stock that most investors would find appealing to one that's probably too expensive for value investors. The yield has gone from roughly average for a utility to below average, which limits its appeal for income-focused investors, too.
NEE Dividend Yield data by YCharts.
If you're looking to maximize your passive-income stream, you've probably missed out on the opportunity to buy NextEra Energy at a historically generous yield. But the dividend growth shouldn't be ignored. NextEra Energy has been viewed as "expensive" for years, but it might be worth paying up for dividend growth in this case.
If you had bought the stock at its highest point in 2013, you would have added it at a split-adjusted price of $22.44 per share when it was yielding around 2.9%, which isn't too far off the current yield of 2.8%. The dividend at that point was $0.165 per share per quarter. Today, the dividend is $0.515 per share per quarter, which would equate to a yield on purchase price of just over 9%. That's a pretty good outcome from what would have been considered a relatively expensive utility stock a decade ago.
NextEra Energy isn't as attractive as it was
To sum it up, NextEra Energy is a unique, high-growth utility stock. Investors are well aware of the company's long history of success and have priced it at a premium to its peers.
Swift rising interest rates caused a drawdown in the stock that left it trading hands at an attractive price, even for those with a value or income focus. But the rally over the past few months has likely closed the window of opportunity. At this point, NextEra Energy looks expensive again, and only those with a dividend growth or growth income focus will probably find it appealing.
