NextEra Energy (NYSE:NEE) Has Announced That It Will Be Increasing Its Dividend To US$0.42

NextEra Energy, Inc. (NYSE:NEE) has announced that it will be increasing its dividend on the 15th of March to US$0.42. Even though the dividend went up, the yield is still quite low at only 2.1%.

View our latest analysis for NextEra Energy

NextEra Energy's Earnings Easily Cover the Distributions

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. We think that this practice can make the dividend quite risky in the future.

Looking forward, earnings per share is forecast to rise by 53.3% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 63% which would be quite comfortable going to take the dividend forward.

NextEra Energy Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the first annual payment was US$0.55, compared to the most recent full-year payment of US$1.70. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Earnings have grown at around 3.0% a year for the past five years, which isn't massive but still better than seeing them shrink. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

NextEra Energy's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think NextEra Energy's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, NextEra Energy has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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