Skip to Content
US Videos

4 Stocks With Healthy Dividend Growth Potential

These utilities feature low payout ratios, solid investment opportunities, and constructive regulatory environments--though they’re not cheap.

Mentioned: , , ,

Despite the headwinds posed by COVID-19, utilities continue to have strong growth prospects, healthy financials, and growing dividends. We think the following utilities have the best dividend growth opportunities, boosted by low payout ratios, robust capital investment opportunities, and constructive regulatory environments.

We forecast that NextEra Energy can increase its dividend 11.5% annually over the next five years, well above its peer group average and the highest in our coverage universe. Additionally, its lower-than-average 62% payout ratio gives NextEra greater flexibility to increase its dividend as cash flows grow. Constructive rate regulation in its service territories and long-term renewable energy contracts at NextEra Resources provide additional dividend support.

American Water Works has begun accelerating its dividend growth with annual increases averaging over 10% during the past seven years. We expect 10% annual dividend growth to continue for the next five years. The company's 56% payout ratio based on adjusted 2020 earnings is low for the sector; thus we believe there is room to increase the dividend modestly faster than earnings growth.

Sempra Energy has derisked its portfolio, focusing on regulated distribution and transmission utilities that are the keys to its healthy capital investment plan. This portfolio pivot, its lower-than-average payout ratio, and cash flows from the contracted Cameron LNG trains should allow Sempra to increase its dividend over 9.0% annually during the next five years.

Lastly, the managers at Atmos Energy ATO have targeted a conservative 50% dividend payout ratio. With our 7.5% earnings growth estimate, we believe Atmos' annual dividend growth could top management's 6%-8% target during the next five years. Atmos enjoys constructive regulation at all of its subsidiaries.

Andrew Bischof, Travis Miller, and Charles Fishman provided the analysis for this report.

Morningstar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.