Dividend Stocks Can Make You Rich: 2 Utility Stocks To Consider Buying Now
IInvesting small amounts of money over time in dividend-paying stocks and reinvesting those dividends can make many investors rich, or at least financially comfortable.
Two dividend-paying stocks worth buying now are America’s leading water and sanitation utilities American Water Works (NYSE: AWK) and power station and renewable energy NextEra Energy (NYSE: NEE).
Image source: Getty Images.
How dividend-paying stocks can make you rich: compound dividends
Dividend stocks are an amazing way to grow wealth over time because of the mix. When you reinvest your dividends (rather than taking your dividends in cash), those dividends will also generate dividends, and so on. So invest in carefully selected products dividend stocks will allow you to grow your money exponentially over time.
Data by YCharts.
The previous chart shows the performance of the shares of US States Water (NYSE: AWR), a California-based water and wastewater utility, and NextEra Energy. (I was unable to include American Water Works – which I prefer – as it has only been listed on the stock exchange since 2008. So for illustration purposes I have highlighted the second largest service d plain American water.)
Over time, the composition of dividends results in a widening of the gap between the appreciation in the price of each share and its total return, that is, the performance resulting from the reinvestment of dividends.
Here is what $ 5,000 invested 30 years ago would be worth:
- American States Water: $ 233,000 (66% of dividends reinvested).
- NextEra Energy: $ 302,000 (67% of dividends reinvested).
- S&P 500 (like investing in an index fund): $ 105,000.
2 of the best dividend-paying stocks for long-term investors
|Society||Market capitalization||Dividend yield||Wall Street’s projected annualized EPS growth over the next 5 years||Total return over 3 years||Total return over 10 years|
American Water Works
|$ 43.1 billion||1.36%||
|NextEra Energy||$ 158 billion||1.91%||8.2%||104%||697%|
|N / A||1.30%||N / A||62.1%||380%|
Data sources: Yahoo! Finance and YCharts. Data as of September 24, 2021. EPS = earnings per share.
American Water Works
Water utilities are attractive for several reasons, including the fact that their regulated activities are legal monopolies and their main product – fresh water – is necessary for life and has no substitute.
American Water has long been my favorite of this group, primarily because it’s the largest and most geographically diverse in the US water and wastewater industry. (It will have regulated companies in 15 states after the sale of its business in New York State is complete.) These characteristics give it an advantage when it comes to making acquisitions, which is very positive because its industry is fragmented.
In addition, climate change (particularly the rise in average temperatures) has already started to boost American Water’s results. As I wrote recently, the company is one of the top three climate change stocks to consider buying now.
American Water has increased its dividend every year since its IPO in 2008. Over the past five years, the dividend has experienced a compound annual growth rate of approximately 10%. Management plans to continue increasing the dividend each year at the high end of the 7% to 10% range until at least 2025.
NextEra Energy is the largest electricity utility in the United States by market capitalization. The company operates two regulated electric utilities in its home state, including Florida Power & Light, the nation’s largest regulated electric utility based on retail electricity produced and sold.
Additionally, through its wholesale power generator subsidiary, the company is the world’s largest producer of renewable energy from wind and sun and a world leader in battery storage. Pressure from the Biden administration to dramatically increase the use of renewable energy to help slow climate change should benefit NextEra Energy.
The company aims to continue increasing its dividend at an annual rate of around 10% until at least 2022.
Don’t let concerns about rising interest rates keep you away from high dividend stocks
Granted, the Federal Reserve could start raising interest rates fairly quickly, and when rates rise, fixed income investments become more attractive compared to dividend-paying stocks. However, even with a few hikes, rates will still be close to their historic lows. Additionally, if you regularly invest in long-term dividend-paying stocks, you should buy them as rates go down and up.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.