We Just Put $1,000 Into This Stock For The Income Builder Portfolio

Zap! That sound you just heard was DTA’s Income Builder Portfolio getting another major jolt of Divvy Dollars!

Many Dividend Growth Investing practitioners own high-quality regulated electric utilities for the reliable, sustainable and rising income those companies produce.

And so on Tuesday, March 13, the world’s largest utility – NextEra Energy (NEE) – became part of the IBP.

I executed a market order for 6 shares at $154.54 apiece. Including the $4.95 brokerage commission, the total paid was $932.19.

There now are five companies in the real-money, real-time portfolio, which debuted in January. NEE joins PepsiCo (PEP), Altria (MO), 3M (MMM) and Amgen (AMGN).

Because Daily Trade Alert is allocating $2,000 per month for two buys, I will have about $1,068 available for our next purchase in two weeks.

Dividend Delight

There are numerous reasons for any investor to strongly consider NextEra Energy.

Near the top of the list: a dividend that has grown for 24 consecutive years.

NEE recently raised its quarterly payout 13% to $1.11 per share.

So come June 15, NEE will pay the IBP $6.66.

As mandated by the portfolio’s Business Plan, all dividends get reinvested right back into the companies from whence they came – a no-cost process informally called “dripping.” After buying NEE, I instructed the brokerage to “turn on the drip.”

If NEE is still trading at about $155 in mid-June, the $6.66 the IBP receives will buy .043 new shares. Then, three months later, the Income Builder Portfolio would get dividends based upon the new share total of 6.043 – making the September payment $6.71. In turn, that will buy another fraction of a share.

Make it rain Divvy Dollars, baby! That’s how an enduring, successful income stream gets built.

Valuation Station

As the metrics I presented in a recent article about utilities on my IBP watch list showed, NextEra Energy is either fairly valued or slightly overvalued.

NEE’s forward price/earnings ratio of around 20 is about the same as its 5-year average P/E, its price is just a few bucks higher than Morningstar’s “Fair Value Estimate” of $150, and its dividend yield of 2.9% is only a tick better than its 5-year average yield of 2.8%.

Credit Suisse has an “outperform” rating on NEE, with a 12-month target price of $172 (highlighted below).

CFRA’s “Fair Value Rank” (5 – most undervalued) and “Fair Value Calculation” ($185.64) suggest NextEra is a decent buy here.

The folks at Value Line really like NEE. They believe that tax reform will be a “boon” to the company, and they predict that a gas-fired plant scheduled for completion next year will bring a rate increase from the state of Florida.

Value Line recently upgraded NEE’s Safety and Financial Strength scores (green circle below), while saying the Relative P/E (blue) is attractive and the price has room to run (red). (A Relative P/E under 1 means a company’s P/E ratio is lower than the average of stocks VL’s analyzes.)

The FAST Graphs valuation tool, which uses “blended P/E ratio,” indicates that NEE is expensive relative to its Normal P/E (red circles below). The blue circled area shows NEE’s price has moved well ahead of its Normal P/E.

Wrapping Things Up

I can understand why value-conscious investors who are protective of their cash and leery of a bull market now in its 10th year might be hesitant to buy any company that is not a verifiable bargain.

However, NextEra Energy is of such high quality, and the Income Builder Portfolio is such a long-range exercise, that I had no qualms at all about initiating a small position Tuesday on the IBP’s behalf.

Obviously, I believe NextEra is a fine company, and I own it myself (it makes up just under 1% of my personal portfolio). Nevertheless, investors should conduct their own due diligence before buying any stock.

— Mike Nadel