Among the top utility stocks, NextEra Energy (NEE) leads with the highest total return in the last five years. It has returned 125% (including dividends) in the period, outperforming its peers and the broader markets. Utilities at large have returned 60%, while the S&P 500 has returned 73% in the last five years.
NextEra Energy, the lowest-yielding utility, has quickly and consistently increased its earnings growth, which has fueled its market performance for the last several years.
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A payout ratio shows the part of a company’s profits that is distributed to shareholders in the form of dividends. Southern Company’s payout ratio was 110% last year. A payout ratio of higher than 100% indicates that a company has distributed dividends from its reserves above and beyond the profits it’s earned during the period.
Duke Energy is among the few utilities with high payout ratios. Duke Energy’s payout ratio was 97%, higher than the industry average, in 2018. Its five-year average payout ratio is ~89%. Utilities generally pay a large part of their earnings in the form of dividends, so superior payout ratios aren’t unusual for them.
NextEra Energy, the biggest constituent of the Utilities Select Sector SPDR ETF (XLU), had a payout ratio of 34%, lower than its peers’ (XLU), in 2018. The company’s large capital investments might be behind its lower payout ratio and its lower dividend yield. Its lower payout ratio also implies a potential for higher dividends in the future. Dominion Energy (D) had a payout ratio of 88% in the period.