We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold Now. In this article, we are going to take a look at where NextEra Energy, Inc. (NYSE:NEE) stands against the other dividend growth stocks.

The AI sector maintained its momentum unabated in the second quarter of 2024, with tech stocks continuing to lead the charge. Despite the Fed scaling back rate cut expectations from three to one at the quarter’s outset, stocks surged to end in positive territory by quarter-end. This was buoyed by better-than-expected inflation numbers and strong first-quarter earnings. The broader market gained 3.48% in Q2 2024 and its 12-month returns came in at over 23.4%. Dividend stocks underperformed the broader market recently, but with tech giants now beginning to issue dividends, analysts are optimistic about dividend prospects this year. The recent addition of Alphabet to the dividend-paying group suggests that these mega-cap tech companies could increase their dividends gradually over time. However, analysts caution that current dividend yields from these stocks remain relatively modest.

In the current market environment, investors are keenly exploring opportunities to boost their income. Despite their low performance so far this year, dividends gain importance in this regard as they have historically been crucial in generating returns for investors over many decades. Since 1960, approximately 85% of the total cumulative return of the S&P 500 Index can be traced back to reinvested dividends and the compounding effect they offer.

When we talk about the compounding effects of dividends, we refer to the advantages they provide, particularly when they grow consistently over time. This growth allows for larger dividend payouts which, when reinvested, can further accelerate the overall investment return through compounding. In addition to providing compounding effects, companies that raise their dividends have also historically outperformed the market and those companies that cut or don’t pay dividends at all. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 9.62% return to shareholders from 1972 to 2018, compared with an 8.78% return of dividend payers. Dividend growers also outperformed dividend non-payers, who returned only 2.40% during this period. Read more about dividend growers in our article, Best Dividend Kings to Buy for Safe Dividend Growth.

A company’s past track record of growing dividends is often the best crystal ball for predicting future growth. A low payout ratio, which measures dividends against earnings, also signals potential for future dividend growth. High dividend yields can falter in tough times, precisely when investors rely on them most. Companies with a history of dividend growth demonstrate their resilience, continuing to increase dividends even in downturns. Currently, there is rising demand for companies that distribute dividends, driven by an aging US population, seeking additional sources of immediate income. According to a report by Janus Henderson, global dividends reached $1.66 trillion in 2023, growing from $1.23 trillion in 2020. The banking sector achieved record-high dividends last year, accounting for half of the global dividend growth. This increase was largely facilitated by a higher interest rate environment, which allowed many banks to expand their profit margins. The firm expects global dividends to reach their all-time high of $1.72 trillion in 2024, which would show a 3.9% growth from 2023 on a headline basis.

Companies that consistently raise their dividends have strong business models and solid balance sheets. In this article, we will take a look at some of the best dividend aristocrat stocks for dividend growth.

Our Methodology:

For this article, we scanned the list of Dividend Aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

NextEra Energy, Inc. (NYSE:NEE)

5-Year Annual Dividend Growth Rate: 10.74%

NextEra Energy, Inc. (NYSE:NEE) is another best dividend aristocrat stock on our list with 28 consecutive years of dividend growth under its belt. The renewable energy company owns Florida Power & Light Company (FPL), which is the largest electric utility in the US. It delivers clean, affordable, and reliable electricity to its 5.9 million customer accounts, serving over 12 million people throughout Florida. Approximately 70% of the company’s operations are linked to FPL, which recently experienced its most significant quarterly customer growth in over 15 years, adding more than 100,000 new customers compared to the same period last year.

Increasing the customer base contributes significantly to growth by expanding the number of electricity consumers. Management has leveraged this strong foundation to establish one of the largest solar and wind power companies globally. According to analysts, the company is poised for continued expansion, with management aiming to more than double its capacity by the end of 2027. This will also contribute to its dividend growth in the future. Continued expectations indicate around 10% annual growth in dividends per share through at least 2026.

NextEra Energy, Inc. (NYSE:NEE) expects to benefit from rising electricity demand in the upcoming years. In one of his recent interviews, the company’s CEO, John Ketchum, highlighted with investors that US power demand is expected to surge by 38% over the next two decades, marking a significant increase compared to the growth rate observed in the previous 20 years. The company foresees renewables and battery storage playing a crucial role in meeting this heightened demand. Currently, NextEra Energy, Inc. (NYSE:NEE) boasts a strong pipeline of 300 gigawatts in renewable energy and storage projects.

NextEra Energy, Inc. (NYSE:NEE) offers a quarterly dividend of $0.515 per share and has a dividend yield of 2.95%, as of July 2. The company’s five-year average dividend growth rate stands at 10.74%, which places it as one of the best dividend aristocrat stocks on our list.

NextEra Energy, Inc. (NYSE:NEE) was a part of 72 hedge fund portfolios at the end of Q1 2024, up from 65 in the previous quarter, as per Insider Monkey’s database. The stakes owned by these hedge funds have a total value of more than $1.73 billion.

Overall NEE ranks 8th on our list of the best dividend growth stocks to buy and hold. You can visit 10 Best Dividend Growth Stocks to Buy and Hold Now to see the other dividend growth stocks that are on hedge funds’ radar. While we acknowledge the potential of NEE as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than NEE but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.