Here’s Why I Just Bought This High Yield Dividend Stock

One of the problems with investing in a particular style, like dividend investing, is that you end up owning a lot of stocks in the same sectors. That’s where I found myself in the utilities sector. I decided to hold off on any more stocks in that space until WEC Energy (World Council 1.62%) popped up on my radar. The story was so good I couldn’t say no and bought it. Here’s why.

What does WEC Energy do?

By most accounts, WEC is an average utility. It provides regulated natural gas and electricity services to about 4.7 million customers in parts of Wisconsin, Illinois, Michigan and Minnesota. It’s not exactly a small utility, but with a market capitalization of $26 billion, it’s not exactly in the top tier of the utility sector either. By comparison, NextEra Energy is an industry giant with a market capitalization of $150 billion and Southern Companya well-known and respected industry leader, has a market capitalization of approximately $90 billion.

As a regulated utility, WEC has been granted a monopoly in the markets it serves. In return, it must have its rates and spending plans approved by the government. That’s not a recipe for a fast-growing company; rather, utilities like WEC tend to perform slowly and steadily. And utility stocks also tend to pay reliable dividends. WEC, for its part, has increased its dividend every year for 21 consecutive years.

Why did I buy WEC Energy?

The first thing that drew me to WEC Energy was the dividend yield, which was about 4% when I bought it. The stock has risen a bit since I bought it, but the yield is still hovering around 4%. That’s a number that gets me interested in stocks in general, but I tend to dismiss most stocks pretty quickly. I couldn’t do that with WEC Energy, at least in part because of its long history of dividend increases. But also because the yield is near its highest level in a decade. That combination suggests it’s a good company trading at an attractive price.

WEC data by YCharts

Digging a little deeper, I noticed that the dividend has grown at an average annual rate of 7% over the last three, five, and ten years. That’s an impressive growth rate for a boring utility, considering that NextEra Energy’s dividend growth rate is around 10%, but that’s a combination of a regulated utility and a rapidly growing renewable energy business. NextEra Energy’s dividend yield is also noticeably lower at just 2.7%.

I’m a conservative investor, so a bigger yield, almost as strong dividend growth, and a really boring business is my cup of tea. It’s time to dig in and try to find a reason not to buy the stock.

What is wrong with WEC Energy?

I think WEC Energy has two big downsides. The first is industry-wide, and that’s rising interest rates. Like all utilities, WEC Energy’s business is capital intensive, and therefore tends to be debt-intensive. Higher interest rates will make servicing that debt more expensive. However, regulators typically take these things into account when setting interest rates, so I don’t see this as a long-term problem. It may be a short-term headwind, but it will resolve itself over time.

In the case of WEC Energy, however, it’s an unfavorable Illinois interest rate ruling that has required the utility to effectively stop working on the state’s natural gas grid. Regulators are studying the role of natural gas in the state and the best course of action with respect to replacing older infrastructure. It seems likely that a fair deal will be reached; it just takes time. But investors don’t like uncertainty, and coupled with rising interest rates, Wall Street is pessimistic about the company’s future for now.

It looks like WEC Energy still has a bright future

So the two biggest problems I see are likely to be temporary, which helped me overcome the concerns I had here. In the meantime, I’m buying reliable dividend stocks with historically high yields. And to add to the charm, management has a $23.7 billion capital investment plan that it believes will grow earnings by 6.5% to 7% annually, and the dividend will likely grow at a similar rate. In other words, management is still very bullish on the future. That was enough to make me hit the buy button. You still have time if you want to follow suit.

Reuben Gregg Brewer has positions in Southern Company and WEC Energy Group. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.