It’s said that many roads lead to Rome.

Well, there are many ways to invest in order to achieve certain goals.

The best way to locate the right road is to first name your goals, then reverse engineer your way from there back to the start.

Well, the most common goal among investors is probably financial freedom.

We all crave freedom, independence, and autonomy.

We all want to live our own lives in our own ways.

With that said, it’s somewhat easy to figure out how to get there.

One simply needs to earn enough passive income to cover all of their bills.

At that point, you’re free to do whatever you want.

In my view, the best way to accomplish that type of setup is through dividend growth investing, a long-term investment strategy that involves buying and holding shares in high-quality businesses sending out safe, growing dividends to shareholders.

This strategy is finely tuned to achieving financial freedom, as it’s easy to line up predictable dividend income against predictable expenses; once the former exceeds the latter, voila.

And dividend income is most predictable when it’s coming from predictable businesses with predictable profits.

That kind of predictability requires businesses of a certain level quality, which means the strategy tends to funnel investors right into great businesses almost automatically.

To see what I mean, take a look at the Dividend Champions, Contenders, and Challengers list, which has compiled invaluable information on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.

Many of these are some of the best and most well-known businesses in the world.

I’ve been employing this strategy over the past 15 years, using it to build the FIRE Fund.

That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.

Actually, this has been enough for me to live off of since I quit my job and retired in my early 30s.

If you’re interested in finding out how I did that, make sure to give my Early Retirement Blueprint a read.

Now, achieving financial freedom via dividend growth investing includes not just investing in the right businesses but also investing at the right valuations.

This is because price only represents what you pay, but value represents what you get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

There are many goals to have, and there are many ways to invest, but linking financial freedom (perhaps the most common goal among all investors) with dividend growth investing is a match made in heaven, allowing investors to amass wealth, passive income, and independence by routinely buying undervalued high-quality dividend growth stocks.

Now, the preceding passage does assume one already understands how valuation works.

If you don’t yet have that understanding in place, no worries, as this is where Lesson 11: Valuation comes in.

Written by fellow contributor Dave Van Knapp, it provides a quick “lesson” on what valuation is, the importance of valuations, and how to go about valuing almost any dividend growth stock out there.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

NextEra Energy Inc. (NEE)

NextEra Energy Inc. (NEE) is an American energy company.

Founded in 1925, NextEra Energy is now a $145 billion (by market cap) major energy provider that employs approximately 17,000 people.

This is the largest utility holding company in the US.

NextEra Energy reports results across three segments: Florida Power & Light, 69% of FY 2024 revenue; NextEra Energy Resources, 30%; and Corporate and Other, 1%.

FPL, the primary business of the overall company, operates the largest electric utility business in Florida, providing electricity to over 12 million people across the state of Florida.

FPL’s energy mix is: 73% natural gas, 20% nuclear, 6% solar, and 1% other.

Based on electricity sales, FPL is the largest utility in the US.

Nearly 60% of FPL accounts are residential, and another ~33% are commercial.

NEER, NextEra Energy’s unregulated renewable energy subsidiary and secondary portion of the overall company, is the world’s largest generator of renewable energy from the wind and sun, and it’s also a world leader in battery storage.

Whereas FPL is contained to Florida, NEER generates and sells power across the US (with more than 34 GW of generation capacity).

As you can already glean from this unique composition, NextEra Energy is a distinctive utility holding company.

It offers investors a one-of-a-kind, best-of-both-worlds opportunity.

On one hand, FPL, which is about two-thirds of the company, gives shareholders exposure to a high-quality regulated utility in a fast-growing (Florida is attracting Americans seeking characteristics such as warmer weather and lower taxes), regulation-friendly (Florida has historically had easier regulatory hurdles for utilities) state.

The traditional utility side of the business is a sleep-well-at-night, steady-eddy, monopolistic operation that takes in reliable revenue from captive customers who cannot live without electricity in a modern-day society, and it’s doing so in one of the very best states in which to run a traditional utility.

On the other hand, NEER gives shareholders exposure to industry-leading renewables.

This additional upside potential, which comes via an unregulated model with less geographic constraints, is something that no other large, regulated power utility company in the US can match.

NextEra Energy has been, is, and (by all accounts) will continuing to be successfully operating both an orthodox electric utility business and a renewable energy business at unrivaled scale.

It’s a combination representing the best of the old and the new.

NextEra Energy, as its corporate name appropriately implies, it’s preparing for the next era of energy via its investments in and usage of newer forms of energy (such as solar and wind power generation, along with battery storage).

The world is slowly moving toward forms of energy which are perceived (rightly or wrongly) to be cleaner and more sustainable for society over the centuries to come.

Utility companies that can see the change coming and adapt to it will be those positioned to survive and even thrive.

At the same time, though, NextEra Energy is smartly and correctly grounded in the present, using proven resources (such as natural gas) to generate electricity for customers who require reliable power 24/7 in the here and now.

NextEra Energy’s all-of-the-above approach to energy has resulted in phenomenal success for decades, and I see no reason why this won’t continue to result in more phenomenal success for decades more, which will lead to more steady growth across the company’s revenue, profit, and dividend.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Already, NextEra Energy has increased its dividend for 31 consecutive years.

That qualifies it as a Dividend Aristocrat, surprisingly a rare feat for a utility.

Its 10-year dividend growth rate of 11% is also rare for a utility, being far higher than what a lot of competing utility stocks offer.

I think this faster growth can be explained by the unique combination of assets, as well as its Florida footprint on the regulated side, showcasing just how special NextEra Energy is.

However, the trade-off for this much higher growth rate is a lower yield, now sitting at 3.2%.

While that isn’t quite as high as what a lot of other utility stocks are currently yielding, it’s also not all that low in either absolute or relative terms.

Speaking more on the relative sense, this 3.2% yield is 90 basis points higher than its own five-year average.

Also, a lot of other utility stocks are yielding less than 4% right now, even though they don’t have anywhere near as much as growth as NextEra Energy.

I think this combination of yield and growth on the stock is almost as unique as NextEra Energy’s mixture of old and new energy subsidiaries.

Plus, with a payout ratio of 63.3%, based on midpoint adjusted EPS guidance for 2025, this is one of the most well-covered dividends in the whole space.

The metrics speak for themselves.

Whereas the company provides investors a best-of-both-worlds scenario, the stock offers shareholders a best-of-all-worlds (yield, growth, and safety) scenario.

It’s a Dividend Aristocrat firing on all cylinders, leaving little to be desired.

Revenue and Earnings Growth

As desirable as all of this may be, though, many of these dividend metrics are akin to looking through the rearview mirror.

However,  investors must always be looking through the proverbial windshield, as today’s capital ultimately gets risked for tomorrow’s rewards.

This is why I’ll now build out a forward-looking growth trajectory for the business, which will be of aid during the valuation process.

I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.

I’ll then reveal a professional prognostication for near-term profit growth.

Blending the proven past with a future forecast in this way should give us the information necessary to thoughtfully gauge where the business could be going from here.

NextEra Energy extended its revenue from $17.5 billion in FY 2015 to $24.8 billion in FY 2024.

That’s a compound annual growth rate of 4%.

Very respectable top-line growth for a utility.

Meanwhile, earnings per share grew from $1.51 to $3.37 over this period, which is a CAGR of 9.3%.

This is strong bottom-line growth for any business, but it’s especially impressive for a utility.

I mean, a lot of other regulated utilities are putting up something closer to 5% bottom-line growth, so NextEra Energy is basically running circles around the competition (which, again, highlights the genius and success of the company’s melding of old and new energy subsidiaries).

We can also see the closeness of EPS and dividend growth over the prior decade, indicating how sustainable the higher-than-average dividend growth has been (because it’s been supported by higher-than-average EPS growth).

Looking forward, CFRA projects that NextEra Energy will compound its EPS at an annual rate of 8% over the next three years.

Although this would be far in excess of what you’ll find from a lot of other power utilities, it would also fall short of what NextEra Energy did over the last decade.

Is this a fair assumption?

I think it is, as it lines up with (albeit at the top end) NextEra Energy’s own guidance calling for 6% to 8% adjusted EPS growth through 2027 (off of a 2024 base).

Giving us further credence is the Q2 report for FY 2025, which showed 9.4% YOY adjusted EPS growth (very close to the 10-year EPS CAGR).

CFRA’s view is supported by strength across both sides of NextEra Energy.

CFRA highlights “…higher electricity prices and continued customer growth in FPL’s service territory.”

It also notes the favorable regulatory environment: “FPL’s full-year 2024 realized ROE was 11.4%, down from 11.8% in 2023, but well above recent electric utility averages. Regulatory Research Associates data indicates a 2024 average authorized ROE of 9.74% for electric utilities.”

FPL operates in what might just be the most favorable state for a power utility, as this high ROE will be a boon throughout the company’s multiyear $50 billion investment plan.

CFRA doesn’t forget about the other side of NextEra Energy: “Though wind and solar development are under pressure, we expect long-term tailwinds for NEER’s renewables backlog (29.5 GW) from rising electricity demand, a result of reshoring, data centers, and AI growth.”

NextEra Energy almost can’t lose.

It has multiple levers to pull as it moves from strength to strength.

No matter how you slice it, it’s operating at a very high level that puts it in its own class.

In addition to the high-single-digit adjusted EPS growth guidance, NextEra Energy also expects ~10% annual dividend per share growth through at least 2026.

Putting it all together, it almost seems unfathomable that the dividend won’t compound at a high-single-digit level over the foreseeable future.

And you’re pairing that with a 3%+ starting yield, making this one of the most compelling overall packages in the utility space.

Financial Position

Moving over to the balance sheet, NextEra Energy has a good (for its industry) financial position.

The long-term debt/equity ratio is 1.2, while the interest coverage ratio is over 3.

For a power utility, these are pretty standard numbers.

The balance sheet is the one area in which NextEra Energy isn’t special or superior.

Profitability, on the other hand, is outstanding.

Return on equity has averaged 11.9% over the last five years, while net margin has averaged 22.2%.

Few competitors are even close to this kind of profitability.

The high ROE (which is a function of how much NextEra Energy is allowed to recoup from its investments through rate plans) illustrates just how favorable its Florida regulatory jurisdiction is.

From almost every angle, NextEra Energy is a best-in-class company.

And with economies of scale, a geographic monopoly over its FPL territory, less geographic constraints in its NEER business, and a constructive regulatory situation that just about guarantees some level of profit, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Litigation, regulation, and competition are omnipresent risks in every industry.

Regulation is a double-edged sword: Regulators allow for utilities to make a reasonable profit, where profit scales with costs, putting a profit floor in place; however, because electricity is a basic necessity and there’s often only one power provider in any one geographic area, regulators put a profit ceiling in place by limiting the rates a utility can charge.

This is a rare industry in which competition at a local level doesn’t exist, as NextEra Energy runs local monopolies across its territory, but it’s possible that customers will become future competitors by generating power at the site of consumption (through solar installations).

NextEra Energy’s FPL is dependent on the regulatory structure and population growth of Florida, but Florida’s positive migration trends and favorable regulatory environment are both promising.

NextEra Energy has exposure to nuclear and the risks therein.

Frequent hurricanes across Florida introduce a high degree of natural disaster risk.

The economics regarding renewables are still not certain, and it remains to be seen how successful NEER will ultimately be over the fullness of time.

Many of these risks are a regular part of the business model, despite NextEra Energy being anything but a regular utility.

And the valuation also seems to be pricing in a lot of regularity, rather than the exceptionality that NextEra exhibits…

Valuation

The forward P/E ratio of the stock, based on midpoint guidance for this year’s adjusted EPS, is 19.5.

That wouldn’t be a terribly high earnings multiple for a run-of-the-mill power utility, but it’s highly reasonable, if not downright cheap, for a best-in-class operator.

The cash flow multiple of 11.8, which is also undemanding on its own, is well below its own five-year average of 14.7.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 7.5%.

Although this dividend growth rate would be high (and inappropriate) for a typical power utility, NextEra Energy is very atypical, and I think it’s clearly proven its ability to compound the dividend at a high-single-digit (or better) rate over time.

This is actually well below the demonstrated 10-year dividend growth rate, as well as management’s guidance for dividend growth over the next several years.

This is a conservative model, but I do prefer to err on the side of caution (which helps to boost the margin of safety).

The DDM analysis gives me a fair value of $97.61.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

In my view, the current price of this stock does not fully reflect its quality or intrinsic value.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates NEE as a 3-star stock, with a fair value estimate of $75.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates NEE as a 4-star “BUY”, with a 12-month target price of $84.00.

I came out on the high end, but we’re all in agreement that this stock is not being appreciated enough right now. Averaging the three numbers out gives us a final valuation of $85.54, which would indicate the stock is possibly 18% undervalued.

Bottom line: NextEra Energy Inc. (NEE) is a best-in-class power utility that offers investors a best-of-both-worlds opportunity in energy, all while operating its regulated arm within the favorable confines of regulatory-friendly, fast-growing Florida. With a market-beating yield, a reasonable payout ratio, double-digit dividend growth, more than 30 consecutive years of dividend increases, and the potential that shares are 18% undervalued, this seems like an opportune time to consider buying this Dividend Aristocrat.

-Jason Fieber

Note from D&I: How safe is NEE‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 90. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, NEE‘s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Disclosure: I’m long NEE.