This underrated usability outshines NextEra. Is it time to buy?

There is no doubt that NextEra Energy (FROM HOME -0.44%) is a well-run company. But this fact is so well-known that investors have driven up the stock to levels that likely fully reflect the information. If you are trying to find a good mix of dividend income and dividend growth, you may want to consider buying WEC Energy (World Council -1.09%) instead of NextEra. Here’s why.

NextEra Energy value is fully included in the price

NextEra Energy is a solid dividend growth utility with a strong regulated utility core (primarily Florida Power & Light) and a rapidly growing renewable energy business. That combination has allowed the utility to increase its dividend every year for three decades. But the real treat for investors is that the dividend growth rate has been attractive, at 10% per year for the past decade.

Image source: Getty Images.

A 10% dividend increase for a utility company, an industry known for being slow and boring, is incredible. Half that would be considered a good number. Interestingly, management is also forecasting dividend growth of 10% per year through at least 2026, so that trend is not expected to end. That number is supported by earnings growth forecasts of 6% to 8%. If you’re a die-hard dividend growth investor, it would make sense if you wanted to buy NextEra Energy.

The problem is valuation. NextEra Energy’s success and positive outlook are well-known. This generally causes the stock to trade at a premium to the utilities sector. For example, NextEra’s dividend yield is currently around 2.6%. The average value of utilities, using Select Sector SPDR ETF Utilities as a proxy is around 3%. This may not seem like a huge difference in absolute terms, especially when you consider S&P500 The index yield is only 1.2%, but this means that we earn about 13% less each year.

WEC Energy gives you more income

For comparison, WEC Energy is offering a 3.6% dividend yield today. That’s 20% more than the average utility and 33% more than what you’d collect if you owned NextEra Energy. That sounds pretty attractive if you’re trying to maximize the income your portfolio generates.

But what about dividend growth? WEC Energy raised its dividend by about 7% in January. It has increased its dividend every year for two decades. The average increase over the past decade has been about 7%. That’s a bit slower than NextEra Energy, but the initial yield is so high that investors looking for a better combination of yield and dividend growth may find it more attractive.

That said, WEC Energy isn’t as large or diversified as NextEra. WEC used to provide natural gas and electricity to 4.7 million customers in parts of Wisconsin, Illinois, Michigan and Minnesota. It’s a much more boring utility, but it still has big plans. Its five-year capital spending goal is $23.7 billion, and it expects to grow profits by 6.5% to 7% annually through 2028. If history is any guide, the dividend will grow roughly in line with profits.

WEC data by YCharts

Again, this is almost as good as NextEra, but with a much higher initial yield. And that’s the big story here. NextEra is a great utility, but one that tends to be fully valued. WEC Energy is a very good utility that seems to be trading at a more attractive level. Interestingly, the dividend yield, even after the stock’s recent rally, is still near the upper end of WEC Energy’s 10-year yield range.

It is worth taking a closer look at WEC Energy

No one will hold it against you for buying an industry leader like NextEra Energy. That doesn’t mean it’s the best option for all investors, though. If you’re willing to accept slightly less dividend growth potential for a utility with a still-strong earnings growth profile and significantly higher profitability, you should put WEC Energy on your shortlist today. And if you already own NextEra Energy, consider adding a new position in WEC Energy.