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NextEra Energy (NEE) is the largest developer of renewable energy in North America. It’s one of the fastest dividend growers in the utility space, notes Brett Owens, chief investment strategist for Hidden Yields.

NextEra Energy is one of those great dividend stocks that is rarely cheap because everyone knows it’s excellent. Its yield has recently been just 1.9%, but 10% raises are likely for the next couple of years.

Does it get any better than that? Believe it or not, yes. One of the few energy dividends growing faster than NEE is NextEra Energy Partners (NEP) — the “yieldco” that was spun off from NEE back in 2014.

Yieldcos were a big thing in the mid 2010's. It felt like every utility was spinning off assets into a yieldco with the promise of, well, a higher yield. The parent company raised quick capital from the IPO. And income-hungry investors were treated to a big, reliable dividend. In most cases, bigger and better than the payout dished by the parent.

Renewable energy is the angle. The yieldco buys the wind farms, for example, from the parent company and runs them. As the leader in renewables, the NEE-to-NEP connection was about as “blue blood” as it gets. Some yieldcos pay more, but we’re after dividend safety and payout upside, in that order. NEP provides us with plenty of both.

The company buys and operates clean energy projects on long-term contracts with stable cash flows. Yes, wind farms, solar farms, and even natural gas assets.

S&P (the credit agency) recently raised its rating on NEP’s business risk profile from satisfactory to strong. It also affirmed the yieldco’s debt ratings. Meanwhile, NEP doubled the size of its revolving credit line to $2.5 billion. Which means NEP has ample credit to go shopping for more renewable energy assets as opportunities arise.

Kirk Crews — chief financial officer of NextEra Energy — hinted on the recent earnings call that a bunch of buying was not needed to hit the partnership’s dividend growth targets. But with a potential recession around the corner, it is always good to have a stack of cash — or access to it.

Note, NEP does not send out a K-1. The firm, though listed as a partnership under state law, files its taxes as a corporation. This is perfectly legal to do. So NEP investors receive a Form 1099-DIV instead of a K-1.

In my view, NEP is the first utility dividend anyone should buy. The recent climate bill could be a net positive for NEP, too. Not that this yieldco needs the help. Let’s get it in the high yield portfolio before its next dividend hike, which is less than a quarter away. I would say NextEra Energy Partners is a buy up to $95.

About the Author

Brett Owens graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today, they serve more than 26,000 business users combined.

He took his software profits and started investing in dividend-paying stocks. Mr. Owens employs a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this "second-level thinking."

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