NextEra: A "Must" Holding for Utility Investors

08/17/2020 5:00 am EST

Focus: UTILITIES

Charles Carlson

Editor, DRIP Investor

Utility stocks are typically viewed as “defensive.” That is, utility stocks usually hold up better than the broad market during downturns, explains Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.

The consistency of the group’s business plus utility stocks’ above-average dividend yields make them a “safe haven” for investors.

However, the market volatility created by Covid-19 has impacted the group’s safe-haven status. Indeed, utilities have traded unevenly this year, with a number of utility stocks trading well off their highs. The group is viewed as having exposure to a variety of areas affected by Covid-19:

➤ Utility stocks have exposure to industrial and commercial users, and the national lockdown and ongoing restrictions on business activity are impacting demand for utility services among certain sectors of the economy.

➤ Utility companies are no doubt facing some issues in terms of customers not paying their bills.

➤ There is an “optics” problem for utilities seeking rate hikes during a pandemic and difficult economy for its customers.

➤ The potential for delays in capital projects due, in part, to the impact on staffing from Covid-19 and delay in funding due to lost revenue and rate-hike delays is a negative for the group.

Utility stocks were not exactly screaming values pre-coronavirus, so there was some air to let out of the stocks. And plenty of air left the group in the February-March downturn, though the stocks have managed to rebound off the March lows.

In more recent sessions, utilities have been especially strong, outdistancing the performance of the Dow Jones Industrial Average, S&P 500, and even the Nasdaq Composite over the last month. Thus, it might be time to reconsider the group.

My favorite among utilities is NextEra Energy (NEE). Based in Florida, NextEra Energy offers a lot to like in the utility space including a growing service region and exposure to alternatives and renewables. Indeed, the firm is the world’s largest producer of wind and solar energy.

The stock has a big universe of potential owners. Because of its position in renewables, NextEra Energy is one of the few utilities that scores well in many ESG (environmental, social, and governance) screens. Thus, ESG investors who want exposure to utilities for market benchmarking purposes will likely choose NextEra Energy.

The company has solid growth. NextEra should show good top- and bottom-line growth in 2020 and 2021. The utility also offers above-average dividend growth. NextEra boosted its dividend 12% earlier this year. That is an impressive growth rate for any company let alone the utility sector. And that increase occurred at a time when dividends are under pressure.

While the dividend yield of 2% is on the low side for utilities, the company should more than make up for the low yield with ample dividend growth and capital appreciation.

The stock is trading around its 52-week high. The stock should remain a leader in the group and is a "must" holding for utility investors. Please note NextEra Energy has a traditional dividend reinvestment plan. The plan is open to current holders of NextEra Energy stock.

If you are an existing holder of NextEra Energy common stock, you may purchase additional shares of common stock by reinvesting all or a portion of the cash dividends paid on your shares of common stock, or by making optional cash investments of at least $100 and up to a maximum of $25,000 per month.

NextEra does not charge to purchase shares in the plan. NextEra also has a “waiver” discount plan in which the firm may permit optional cash investments in excess of this maximum amount in some months and may offer discounts of up to 5% on these investments of over $25,000.

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