3 utility stocks with world-class dividends

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Most utility stocks pay a dividend, thanks to the regulated and resilient nature of utilities that allows businesses to generate stable, often predictable income and cash flows. Utility stocks, therefore, are often found in the portfolios of income investors.

However, one mistake investors make is chasing dividend yields. That’s not to say that a high return isn’t better, but neglecting stocks just because their returns aren’t that good could mean missing out on big returns. This is what I discovered when I delved into dividend-paying utility stocks, which is why the three utility stocks I chose here have two themes in common: paying dividends from world class and dividend growth track record.

This stock almost guarantees high annualized returns

Duke Energy (NYSE: DUK) is a heck of dividend stocks if you are looking to invest in a traditional utility. Here’s why:

  • It is one of the largest electricity companies in the United States in terms of customer base.
  • It is the second largest publicly traded company by market capitalization, as of this writing.
  • It is a public electricity and gas service regulated at 95%.
  • It reports 4.2% today.

As a regulated utility, Duke may increase rates at regular intervals as long as it spends enough infrastructure to obtain approval for rate increases from the utility boards. During its recent inauguration ESG investor Today, Duke laid out investment plans of $ 58 billion between 2020 and 2024 and $ 65 to 75 billion between 2025 and 2029, with more emphasis on clean energy. Duke believes the program should help him reach the high end of his projected growth rate of his adjusted earnings per share (EPS) of 4% to 6% through 2024.

Image source: Getty Images.

This earnings growth, combined with Duke’s target dividend of 65% to 75%, should ensure higher dividends year after year. So far, Duke has increased its dividends every year for the past 14 consecutive years. Assuming an average annual rise in dividends and a return of around 4% each, you could earn high single percentage annual returns on Duke shares, and even more, in times of volatility.

Watch this income report

American Water Works (NYSE: AWK) effortlessly proves how a boring stock can be a multibagger. The credit goes to steady growth in earnings and dividends, supported by a highly regulated business model.

AWK Graphic

AWK given by YCharts

American Water provides water and sanitation services to nearly 15 million customers in 46 states. The company has increased its dividend every year since its initial public offering in 2008. The best part is that its dividend growth rate has accelerated in recent years, with the company offering shareholders a solid dividend increase of. 10% in 2020.

This dividend streak is here to stay. Through 2024, American Water predicts the dividend will grow at a compound annual rate of 7-10%, fueled by similar EPS growth. The company is targeting $ 20 billion to $ 22 billion in capital spending over the next decade, which should serve two purposes: to help American Water convince regulators to approve higher tariffs and to exploit the opportunities in the fragmented water industry in the United States.

In the last quarter, American Water increased its forecast for 2020, projecting nearly 14% EPS growth. With profits just around the corner and a rise in dividends expected in a few months, American Water is likely heading for another strong year after a bumper 2020.

Best bet on renewable energies

NextEra Energy (NYSE: NEE) offers the best of both worlds: a traditional utility vehicle with increasing weight in the renewable energy sector. NextEra owns the largest regulated utility in the United States, Florida Power & Light Company, and is the world’s largest producer of wind and solar power. It’s important to note that this is one of the best dividend growth stocks you can find in the industry today.

NextEra is currently on a strong growth trajectory. In 2020, NextEra added a record 7 gigawatts (GW) of renewable energy projects and plans to build from 23 GW to 30 GW between 2021 and 2024. After increasing its adjusted earnings per share by 10.5% in 2020 , NextEra predicts adjusted EPS growth of 7% at the midpoint in 2021, and between 6% and 8% per year through 2023. CEO Jim Robo even said he would be disappointed if NextEra didn’t hit the mark. the peak of its adjusted EPS forecast through 2023. That should also mean big dividends: Management expects 10% annual growth in dividend per share until “at least” 2022.

NextEra’s dividend growth is the main reason you should look beyond the stock’s weak 1.7% yield, as this growth is also the main factor behind the boom in the stock market. action over the past decade.

NEE chart

BORN given by YCharts

Dividend Growth: The Key to Utility Stock Picking

By now, you would have understood what has fueled the rally in Duke Energy, NextEra Energy, and American Water Works stocks over the years: their dividend stability and growth. If you keep this in mind when selecting utility stocks to invest in, you would be able to create great wealth even from this boring industry.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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