Sometimes a great company isn't that great an investment because it trades hands at a premium price. That's the big story around NextEra Energy(NYSE: NEE), which is up a dramatic 15% or so in 2024, compared to a 10% gain for the average utility. In comparison, WEC Energy(NYSE: WEC) trades down a couple of percentage points and is an attractive, though out-of-favor, high-yield dividend growth stock.
Here's why WEC is the ultimate dividend growth stock to buy today if you have $500 (or more), available to invest.
What does WEC Energy do?
With a market cap of around $26 billion, WEC Energy is not in the top tier of the U.S. utility sector, which is dominated by NextEra Energy and its huge $145 billion market cap. Being so large provides NextEra Energy with some material benefits, not the least of which is easy access to capital markets in a capital-intensive industry. But WEC Energy is hardly small. Note that utility Black Hills is a Dividend King, even though it only has a market cap of around $4 billion.
In other words, size is important, but it isn't the end-all and be-all, particularly when you are talking about companies that have government-granted monopolies in the regions they serve. As a regulated natural gas and electric utility serving 4.7 million customers in parts of Wisconsin, Illinois, Michigan, and Minnesota, this is exactly what underpins WEC Energy's business.
What's interesting here is that WEC Energy's business is virtually all regulated, while NextEra Energy's portfolio is split between regulated utility assets and a fast-growing clean energy business. Sure, NextEra Energy has achieved great success with its clean energy investment, becoming one of the largest solar and wind companies on the planet. But if you want a boring utility, well, it's not that. It's a kind of hybrid clean energy/utility option. That may be just fine for some investors, but perhaps more conservative types would prefer something a bit more boring like WEC Energy.
WEC Energy is doing more with less
NextEra Energy has an impressive streak of 30 consecutive annual dividend increases and a 10-year annualized dividend growth rate of 11%. It is hard for a boring old utility to compete with that, and it highlights the added value that NextEra Energy has given to investors thanks to its decision to branch out into clean energy investments. But WEC Energy's annual dividend streak is a very respectable 21 years, with a 10-year annualized dividend growth rate of 7%. That's pretty solid given that WEC Energy has stuck to its regulated utility roots.
What's even more impressive is the consistency. The annualized dividend growth rate is 7% over the past one-, three-, five-, and 10-year periods. This isn't a situation where one big dividend increase has inflated the historical dividend growth rate. WEC Energy is just super consistent. That's not expected to change, with management calling for earnings growth of between 6.5% and 7% a year through 2028. That's not only a very attractive growth rate for a utility, but also a shockingly narrow range. It speaks to the company's strong belief in its nearly $24 billion in capital spending plans for the next five years.
NEE Dividend Yield data by YCharts.
So far, the story is that WEC Energy is nearly as good a dividend growth stock as NextEra Energy. But here's the tipping point that makes WEC Energy the ultimate dividend growth stock to buy now -- it has a historically high 4% or so dividend yield. That's well above NextEra Energy's 2.9% yield and the 3.2% yield of the average utility, using the Utilities Select Sector SPDR ETF(NYSEMKT: XLU) as an industry proxy.
Basically, with WEC Energy, you are getting a strong dividend growth rate and a high yield from a boring company that has a history of executing well. If the dividend grows by roughly the same rate as earnings, which is reasonable to expect, that 4% yield quickly gets to the 10% or so return you'd expect from the broader market.
Act now before more investors catch on to WEC Energy
WEC Energy's historically high yield probably won't last forever, given the reliable dividend growth it has achieved over time. That said, there are some headwinds here. First, higher interest rates will increase costs. Second, it is working through an adverse ruling from a regulator in its natural gas business. Neither of these is likely to be a permanent problem. So if you think in decades and not days, now is the time to jump on this lesser-known dividend growth utility.
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Reuben Gregg Brewer has positions in Black Hills and WEC Energy Group. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
