Over the past 50 years, stocks that pay dividends have, as a class, outperformed stocks that don’t. The best total returns for investors came from companies that had higher payout ratios (and therefore, higher dividend yields), and also steadily increased their payouts over time.
So for investors who hope to build up a generational heritage, high yield dividend growth stocks are among the best options. Three such stocks that our contributors believe will produce excellent returns in the years to come are The Southern Company (NYSE: SO), Brookfield Power (NYSE: BEPC)(NYSE:BEP)and NextEra Energy Partners (NYSE:NEP).
Buy this utility and reinvest the dividends
Reuben Gregg Brewer (The Southern Company): Investors often pay too much attention to price appreciation when evaluating investments. But over time, dividends have accounted for about a third of total returns in the broader market. And dividends also bring stability, giving you something to watch other than stock prices when the market is boiling. So why not buy shares of a company that has kept its dividend stable or increased it annually for more than 75 consecutive years?
The Compagnie du Sud, one of the largest electric and natural gas utilities in the United States, currently offers a return of approximately 3.8%. While it’s not huge, it’s way above the yield that the S&P500 Index performs well, and is significantly better than average utility yield of 2.7%, based on Vanguard Utilities Index ETF as agent. And then there’s that amazing dividend sequence that you can build on by letting the dividends automatically reinvest and accumulate over time.
The only major downside to this title is that The Southern Company is currently building a pair of nuclear power plants that are delayed and over budget. However, they are now expected to be completed by the end of next year. Once online, this headwind will turn into a tailwind as the utility can include two reliable baseload power sources that emit zero carbon. This fits perfectly with the current environmental zeitgeist and should position the company and its shareholders well for future dividend growth.
An unprecedented opportunity
Matt DiLallo (Brookfield Renewable): Humanity must drastically reduce its carbon emissions to avoid the worst potential impacts of climate change. According to one estimate, fully decarbonizing the global economy will require investments of more than $150 trillion over the next 30 years. This offers unprecedented business opportunities for companies focused on decarbonization.
One of the early leaders to capitalize on the decarbonization megatrend is Brookfield Renewable. It operates a globally diversified portfolio of renewable energy operations. It currently has 21 gigawatts (GW) of clean power generation capacity, enough to supply the City of London with emission-free power. Meanwhile, it still has 69 GW of renewable energy assets under development, which will prevent carbon emissions equivalent to those of New York City.
Brookfield estimates that its development projects will help increase its cash flow per share by 3% to 5% per year. Add to that inflation-induced annual rate increases on its current power contracts and its ability to secure higher power rates when its existing agreements expire, and Brookfield expects to be able to increase by organically its cash flow per share from 6% to 11% per year. This will easily support the company’s plan to increase its dividend by 5% to 9% per year. On top of that, Brookfield sees the potential to add up to an additional 9% to its bottom line each year by making acquisitions.
That’s up to 20% annual growth on top of an ever-increasing dividend that, at the current share price, yields 3.6%. This is the type of total return profile that can produce lasting wealth.
A stock with strong growth potential
Neha Chamaria (NextEra Energy Partners): Companies that pay regular, generous, and growing dividends can reward long-term shareholders generously, especially if their management teams prioritize shareholder returns. NextEra Energy Partners is one such company.
Investors who bought shares of NextEra Energy Partners when it debuted on the New York Stock Exchange in 2014 and held them have seen those shares more than double in value since then. And those who have reinvested their dividends throughout have earned significantly more, as the company has increased its dividend every quarter since 2014. Its annualized dividends rose nearly 300% in the fourth quarter of 2021.
Although past performance is not a guarantee of future results, investors who buy and hold shares of NextEra Energy Partners and reinvest their dividends are likely to make money over the long term. There are two reasons for this.
The first is the growth potential of the company’s activities. NextEra Energy Partners has one of the largest clean energy portfolios in the world, with a focus on wind and solar power. To grow, the company can acquire assets from its sponsor, NextEra Energy (NYSE:NEE), or other third parties. As countries around the world strive to switch from fossil fuels to clean energy, the the opportunities are enormous. And NextEra Energy is already the world’s largest producer of wind and solar power.
Second, since these are assets under contract, NextEra Energy Partners can expect to generate steady cash flow and pay generous dividends. Right now, it’s aiming to increase its payouts by 12% to 15% per year through 2025, and I strongly expect that trend to continue beyond that. All of this, combined with its already high yield – at the current share price, around 3.8% – makes NextEra Energy Partners the kind of stock that could help you create a lasting legacy for your family.
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Matthew DiLallo has positions at Brookfield Renewable Corporation Inc., Brookfield Renewable Partners LP, NextEra Energy and NextEra Energy Partners. Neha Chamaria has no position in the stocks mentioned. Reuben Gregg Brewer held positions in the Compagnie du Sud. The Motley Fool fills positions and recommends Brookfield Renewable Corporation Inc. and NextEra Energy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.