Tesla(NASDAQ: TSLA) is a polarizing stock thanks partly to its larger-than-life CEO, Elon Musk. But Musk's theatrical flare literally helped to create the electric vehicle (EV) industry. Now, with almost every major automaker building EVs, there's going to be a secondary growth effect in a sector known for being boring and reliable. Here's what you need to know and why you might want to buy these three dividend stocks.
A step change in demand
Between 2000 and 2020, demand for electricity was modest, growing only 9%. That's not an annualized figure, it is the growth in demand over that entire 20-year period. There were a number of large and important trends over that period that caused this long lull in demand, most notably being the effort to reduce energy consumption through energy-efficient products. LED light bulbs are the most obvious example for most consumers, but a similar process was taking place throughout the industrial economy as well.
Image source: Getty Images.
But the efficiency effort has largely played out and the effort to use cleaner technologies is still working through society. That includes replacing older, dirtier tech with cleaner, newer tech. The prime example here is electric vehicles replacing internal combustion engine (ICE) vehicles. And that process was basically started by Elon Musk and Tesla. He proved that EVs could be a real competitor to ICE vehicles. Now, just about every major automaker is building EVs and there are a number of material start-ups doing the same.
This should dramatically increase electricity demand, further fueled by the rapid growth of artificial intelligence (AI). Between 2020 and 2040, electricity demand is projected to increase by 55%. That's six times the increase in demand between 2000 and 2020. The growth is going to be driven in the near term by AI, which is expected to see an increase in demand of 300% over 10 years. The longer term is expected to be driven by EVs, which are projected to see an increase in electricity demand of 9,000% by 2050, a truly massive figure.
Dividend investors can take advantage of EV growth
The demand increase for electric utilities isn't going to be a one-time event. It is going to be a years-long process that will require significant capital investment and lead to growth in what has been a fairly boring sector for a long time. Given that demand is leading the growth, regulators are highly likely to approve the needed capital investments and rate requests from regulated electric utilities. This is fabulous news for conservative income investors.
For those with a dividend growth approach, NextEra Energy(NYSE: NEE) is probably going to be the best choice. The utility has a 3.2% dividend yield backed by 31 annual dividend increases. However, the big story here is that the dividend has increased at a roughly 10% annualized clip over the past decade, with management expecting to maintain that rate for the foreseeable future. The company is actually two businesses in one, with the foundation built upon its regulated utility operations in Florida and the growth coming from its large renewable power operations.
For truly conservative investors who prefer higher-yielding fare, Black Hills(NYSE: BKH) might be the better pick. This electric and natural gas utility is fairly small, with a market cap of just $4 billion (for reference, NextEra Energy's market cap is over $140 billion). However, it is one of the few utilities that has managed to achieve Dividend King status, with its 55 annual dividend increases.
Add in a fairly high dividend yield of 4.6%, compared to the utility average of 2.9%, and you can see why income-focused investors might like Black Hills. That said, dividend growth is likely to be more modest than what NextEra Energy can offer, with Black Hills calling for earnings to advance 4% to 6% a year and dividends rising at about the same rate.
A solid turnaround story in the utility space, for investors who are a bit more aggressive, is Dominion Energy(NYSE: D). This company has spent years slimming down its business to the point where it is now a pure-play electricity provider. That said, the process included a dividend cut and a current focus on strengthening the balance sheet and reducing the payout ratio so that it is in line with the industry average.
In other words, no dividend growth for a little while. But that's made up for by the lofty 4.9% dividend yield. And, once the payout ratio is worked down, dividend growth is likely to start up again. It's a fairly low-risk turnaround story for investors who are happy to collect an above-average yield while they wait for better days.
Three options, but there are more
The growth of the EV market, jump-started by Tesla, is expected to create a step change in demand for regulated utilities. That will change them from sleepy businesses to faster-growing and more attractive investments, with a notable dividend component in the mix. There are opportunities throughout the sector, but NextEra Energy stands out on the dividend growth front, Black Hills for dividend reliability, and Dominion Energy when it comes to its turnaround appeal.
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Reuben Gregg Brewer has positions in Black Hills and Dominion Energy. The Motley Fool has positions in and recommends NextEra Energy and Tesla. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
