If I could only buy one dividend stock in September, it would be this one.
I like generating passive income because it gives me more financial flexibility. Dividend stocks are one of my main sources. For this reason, I regularly buy more shares of various dividend-paying stocks each month because I have the money to invest.
However, if I could only buy one dividend share this month of September, NextEra Energy (BORN -1.33%) would be at the top of my list. Here’s why it stands out as a great income investment this month.
A rock-solid revenue stream now
NextEra Energy’s dividend may not appeal to investors looking for high yield dividend yield. However, at 2%, it is higher than the return of 1.6% on a S&P500 index fund.
More importantly, this payment is based on an incredibly solid base. Like a utility, NextEra Energy generates very stable revenues supported by government-regulated tariff structures and long-term contracts. Meanwhile, demand for electricity and natural gas tends to be relatively stable, even during recessions. This provides the company with a stable income to support its payment.
NextEra Energy pays out a conservative percentage of its earnings as dividends. His dividend distribution rate was 60% at the end of last year, below its peer group average of 65%. This gives it a larger safety net while allowing it to retain more cash to fund its expansion.
NextEra also has an industry-leading balance sheet with A-rated credit backed by strong credit metrics. This gives it better access to low-cost financing to invest in expansion projects.
Finally, he has an additional source of capital that the others do not have: NextEra Energy The partners (NEP -0.18%). He created this entity to acquire, own and operate clean energy infrastructure. This strategic relationship allows NextEra Energy to recycle capital by selling revenue-generating clean energy infrastructure assets to NextEra Energy Partners. This, in turn, provides NextEra with cash to fund new development projects, while giving NextEra Partners another cash asset to support its rapidly increasing dividend.
Even more income later
What takes NextEra Energy’s dividend to a whole new level is its growth potential. The company aims to increase its payout by around 10% per year until at least 2024.
The rapid increase in company profits is driving this outlook. NextEra Energy is investing heavily to continue building Florida’s premier electric utility and world-class business renewable energy-generation portfolio. The company plans to invest between $85 billion and $95 billion by 2025 on its two growth engines. He expects these investments to boost his adjusted earnings per share by about 10% a year at the high end of his guidance range. During that time, he sees operating cash flow increasing at or above that level.
The company’s ability to grow its dividend at a high rate should give it the power to produce above-market total returns. Over the past 15 years, NextEra Energy has grown its adjusted earnings per share at a compound annual rate of 8.4% while increasing the dividend at an annual rate of 9.8%. This rapidly increasing dividend has helped generate total returns that have nearly tripled against the S&P 500 over this period.
Meanwhile, NextEra Energy should have enough power to continue growing at an above-average rate for years to come. He revealed his audacity “Real Zero” Strategy earlier this year to eliminate carbon emissions from its Florida utility by 2045 and lead the country’s decarbonization. This allows it to capitalize on a $4 trillion business opportunity that could drive growth over the next 30 years.
An excellent long-term dividend stock
NextEra Energy has everything I could want in a dividend stock. It offers an above-average return backed by strong finances. Because of this, it has the financial flexibility to capitalize on the huge renewable energy opportunity. This should fuel healthy growth for years to come, allowing NextEra Energy to increase its dividend at an attractive rate.
This combination of growth and income should allow NextEra to deliver above-market total returns, which will help me reach my financial goals faster. This is why I regularly buy more stocks each month, which I intend to continue in September.
Matthew DiLallo holds positions at NextEra Energy and NextEra Energy Partners. The Motley Fool fills positions and recommends NextEra Energy. The Motley Fool has a disclosure policy.