This overlooked utility outshines NextEra. Is it time to buy?

There is no doubt that NextEra Energy (NO -0.44%) it is a well run company. But this fact is so well known that investors have bid shares up to levels that presumably fully reflect the information. If you’re trying to find a good mix of dividend income and dividend growth, we recommend buying WEC Energy (WEC -1.09%) instead of NextEra. Here’s why.

The value of NextEra Energy is totaled in the price

NextEra Energy is a solid dividend growth utility with a strong core of regulated utilities (mostly Florida Power & Light) and a fast-growing renewable energy operation. This combination has allowed the utility to increase dividends annually for three decades. But the real treat for investors is that the dividend growth rate has been 10% per year over the past decade.

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Ten percent dividend growth for a utility, an industry known for being slow and boring, is incredible. Half of this level would be considered a good number. Notably, management is also calling for dividend growth of 10% per year through at least 2026, so this trend is not expected to end. This figure is supported by an earnings growth projection of 6% to 8%. If you’re a core dividend growth investor, it would make sense if you’d want to buy NextEra Energy.

The problem is valuation. NextEra Energy’s success and positive outlook are well known. This generally leaves stocks at major prices to the utilities sector. For example, NextEra’s dividend yield is currently about 2.6%. Average utility is, using Utilities Select Sector SPDR ETF as a proxy, it is about 3%. This may not seem like a huge difference on an absolute basis, especially when you consider S&P 500 The index yields a paltry 1.2%, but that means collecting about 13% less income each year.

WEC Energy gives you more income

By comparison, WEC Energy offers a dividend yield of 3.6% today. That’s 20% more than the average utility and 33% more than you’d collect if you owned NextEra Energy. 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 raised its dividend annually for two decades. Average growth over the past decade has been around 7%. It’s a bit slower than NextEra Energy, but the initial yield is so much higher that investors looking for a better mix of yield and dividend growth might find this more appealing.

That said, WEC Energy isn’t as big or diverse as NextEra. WEC supplied 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 target is $23.7 billion and it is expected to grow earnings by 6.5% to 7% annually through 2028. If history is any guide, the dividend will grow to roughly consistency with earnings.

WEC data by YCharts

Once again, it’s almost as good as NextEra, but with a significantly higher starting yield. And that’s the big story here. NextEra is a great utility, but one that usually comes at a full price. WEC Energy is a very good utility that appears to be trading at a more attractive level. Notably, the dividend yield, even after a recent run-up in the stock, is still near the upper end of WEC Energy’s 10-year yield range.

WEC Energy deserves a closer look

No one would blame you for buying an industry leader like NextEra Energy. However, that doesn’t mean it’s the best option for all investors. If you’re willing to accept slightly lower dividend growth potential for a utility with a still strong earnings growth profile and much higher yield, you should put WEC Energy on your short list today. And if you already own NextEra Energy, consider increasing that position with a new one in WEC Energy.