Tesla’s Influence Fuels Growth in Electric Utilities Sector
Tesla (NASDAQ: TSLA) has become a divisive stock, largely due to its high-profile CEO, Elon Musk. Musk’s dramatic approach has played a crucial role in shaping the electric vehicle (EV) market. As nearly every major automaker enters the EV space, the utility sector could be in for a significant transformation, moving away from its traditional reputation for stability. Here’s what you need to know about this evolving landscape and why investing in dividend stocks may be beneficial now.
Rising Demand for Electricity
From 2000 to 2020, electricity demand experienced a modest increase of just 9%. This figure represents total growth spanning two decades, largely due to various trends aimed at energy efficiency. Notable advancements, such as LED light bulbs, have been influential in consumer habits and across industries.
Many of these efficiency initiatives have run their course, paving the way for new technologies, especially as society shifts towards cleaner energy solutions. Electric vehicles are a prime example, gaining momentum thanks to Tesla and Musk’s initiatives, proving that EVs can effectively compete with traditional internal combustion engine (ICE) vehicles. Today, a vast number of automakers and startups are dedicated to developing EVs.
Such a shift is predicted to significantly boost electricity demand. Between 2020 and 2040, electricity consumption is forecasted to rise by 55%, six times the growth seen from 2000 to 2020. This surge will be driven initially by advancements in artificial intelligence (AI), expected to increase demand by 300% over the next decade. Looking further ahead, EVs are anticipated to increase electricity demand by an astonishing 9,000% by 2050.
Dividend Opportunities in the EV Growth Era
The anticipated rise in demand creates a long-term growth opportunity for electric utilities, warranting significant capital investment. This trend presents an attractive prospect for conservative income investors, as regulatory approvals for necessary investments are likely to be favorable.
For investors focused on dividend growth, NextEra Energy (NYSE: NEE) stands out. The company boasts a dividend yield of 3.2%, supported by 31 consecutive annual increases. Over the past decade, its dividend has grown at an annualized rate of approximately 10%, with management projecting this growth to continue. NextEra Energy operates two main business segments: its regulated utility services in Florida and its substantial renewable energy portfolio.
In contrast, Black Hills (NYSE: BKH) provides a higher yield for conservative investors. With a market capitalization of $4 billion—compared to NextEra’s $140 billion—this utility has achieved Dividend King status, announcing 55 consecutive dividend increases. Its yield stands at 4.6%, exceeding the utility sector average of 2.9%. However, its future dividend growth may be more modest, as earnings are projected to rise between 4% and 6% annually.
For investors willing to take a slightly more aggressive stance, Dominion Energy (NYSE: D) presents a compelling turnaround story. The company has streamlined its operations to focus solely on electricity generation, though this included a dividend cut and an emphasis on strengthening its balance sheet. While dividend growth may be on hold for the time being, Dominion offers a respectable yield of 4.9%. Once the payout ratio aligns with industry standards, growth in dividends is expected to resume.
Exploring More Options in the Electric Utility Sector
The expansion of the EV market, initiated by Tesla, is anticipated to create substantial demand for regulated utilities, transforming them into more dynamic and appealing investment options. While opportunities abound, NextEra Energy is highlighted for its dividend growth potential, Black Hills for reliability, and Dominion Energy for its turnaround strategy.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
