Investing is all about trade-offs. For example, what's more important to you: Dividend yield or dividend growth? Both are valuable, but high-yield stocks often have low dividend growth rates. And companies with rapidly growing dividends often have low yields. If you're looking at NextEra Energy(NYSE: NEE) as a way to get a good mix of yield and growth, you'll want to consider smaller utility peer WEC Energy(NYSE: WEC) instead. Here's why.
There's a lot to like about NextEra Energy
NextEra Energy is a well-run utility with a unique business. It owns one of the largest regulated utilities in the United States, using that as a platform to build one of the largest solar and wind power companies in the world. There's really no other utility that has a similar business. And it's how NextEra Energy has managed to increase its dividend at a compound annual rate of 10% a year over the past decade.
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The foreseeable future, meanwhile, is expected to be just as exciting as the past, with management calling for earnings growth of between 6% and 8% a year through at least 2027 and dividend growth of 10% a year through 2026. There's only one problem: Wall Street is well aware of how well run NextEra Energy is, and the stock is often afforded a premium price.
To put a number on that, the average utility, using Utilities Sector Select SPDR ETF(NYSEMKT: XLU) as a proxy, is currently yielding around 3.2% while NextEra Energy's dividend yield is just 2.7%.
WEC Energy offers a good combination of yield and dividend growth
If you're looking for a combination of yield and dividend growth, there's a better choice. While NextEra Energy is an industry giant with a market cap of $155 billion, WEC Energy is a bit smaller and less known, with a market cap of $25 billion. While it's still a big utility, it's just not in the first tier of the industry. But it has increased its dividend at a roughly 7% clip over the past decade. That's pretty good, and a pace that seems likely to continue, given that management is calling for earnings growth of 6.5% to 7% a year for the foreseeable future. Notably, the last dividend increase, made in January, was 7%.
But why go with a utility that's growing its dividend at just 7% when you can get 10% dividend growth from NextEra Energy? Well, WEC Energy's dividend yield is 4.1%. That's a dramatic uptick from the 2.7% that NextEra Energy is offering. And WEC Energy's yield is also above that of the average utility. In other words, WEC Energy will probably be attractive to income investors, dividend growth investors, and even value investors today.
The best part is that the fundamental story appears strong. Although this natural gas and electric utility isn't expecting its natural gas business to be a strong grower, expanding at just 0.7% to 1% a year, the electricity operation is projected to expand at a 4.5% to 5% clip, which is pretty strong. That growth is being helped along by increasing demand from power hungry data centers.
The negative here, and what is probably opening up the opportunity, is that WEC Energy recently received an adverse ruling within its natural gas business. That's a headwind, for sure, but management doesn't seem to see it being a major problem. And given the impotence of natural gas for heating within the regions WEC serves, it does appear reasonable to expect an equitable solution in time to the impasse.
Act now while Wall Street is worried
Here's the thing: Like NextEra Energy, WEC Energy was once afforded a higher valuation. So the 4%-plus yield on offer here may not last very long. And given the still generous dividend growth that's being projected, it seems likely that investors trying to find a good balance of yield and dividend growth will swoop in and buy up the stock. If a fast-growing dividend and a 4% yield sounds like something you'd like to have in your portfolio, you'll probably want to act sooner rather than later. All things considered, it looks like a better all-around option than premium-priced NextEra Energy.
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Reuben Gregg Brewer has positions in WEC Energy Group. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
