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Why Concerns over NextEra’s Dividend Yield May Wane in the Future

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Sep. 26 2016, Updated 7:05 a.m. ET

NextEra Energy’s dividend yield

NextEra Energy (NEE) has paid dividends of $2.61 per share so far in 2016. Currently, it’s trading at a dividend yield of 2.8%, as compared to the average yield among US utilities of 4% (as of September 21, 2016). NextEra’s annual dividend growth has been more than 11% in the past year. It was 9.5% for the past five years.

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Peer comparison

Duke Energy (DUK), the second-biggest utility by market capitalization, yields 4.4%. Southern Company (SO) yields nearly the same. Both these utilities have almost entirely regulated operations. This factor facilitates stable earnings growth, and stable earnings generally bode well for stable dividends.

By contrast, NextEra Energy generates significant earnings from unregulated operations. But its earnings are relatively stable because it sells its merchant power under long-term contracts, which gives revenue predictability and minimizes earnings volatility.

NextEra Energy’s Oncor acquisition is likely to be a game changer for the company—and for investors. The substantial addition of regulated operations may accelerate NextEra’s earnings growth, which may also improve its dividend yield.

ETF exposure

The iShares Select Dividend ETF (DVY) is a fund that tracks the investment results of an index consisting of high dividend-paying US companies. The fund has 100 stocks in its holdings, with five-year records of dividend payments, and it has the maximum weight of nearly 30% in US utilities. Notably, NextEra Energy makes up over 2% of DVY.

In the next part, we’ll continue our discussion of dividends among major utilities. What can investors expect going forward?

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