A heat wave has gripped much of the country this summer. That has people cranking up their ACs to cool down, which is boosting power demand. The rise in power consumption and prices will likely raise the average power bill by about 3% this year compared to last summer.
The current heat isn't the only factor driving up power demand. The increasing electrification of the transportation sector, growth in power-hungry data centers (especially for AI), and other catalysts have the country on track to see a surge in power demand through the end of the decade.
Instead of sweating the heat wave (and rising future power prices), you can cash in on red-hot demand for power. Dominion Energy(NYSE: D), NextEra Energy(NYSE: NEE), and Duke Energy(NYSE: DUK) stand out to a few Fool.com contributors as great ways to potentially generate lots of dividend income from growing power demand.
Dominion Energy is a high-yield work-in-progress
Reuben Gregg Brewer (Dominion Energy): To get the bad news out up front, Dominion Energy's dividend won't be growing for a few years. That's because the company has just completed a corporate overhaul that includes selling natural gas utility assets so that it can focus on its electric utility business. Also in this mix is the goal of shoring up the company's balance sheet and reducing its payout ratio to be more in line with peers.
Thus, no dividend growth for now. But you will be paid very well to wait for Dominion's dividend to start growing again via the stock's attractive 5.4% dividend yield. That's well above the utility average of around 3%. However, the real attraction here is the markets Dominion serves in the Southeastern United States, which includes one of the world's fastest-growing data center markets.
To put some numbers on this, Dominion added 94 data centers to the grid over the past five years and expects to add another 15 in 2024. And there will be more to come in the future. Data centers use a tremendous amount of electricity and support the long-term demand growth that will help Dominion get its capital spending plans and rate requests approved by regulators.
Longer term, Dominion is projecting earnings growth of between 5% and 7%. And once the company has solidified its finances, dividend growth will likely resume and track earnings growth. So, you get a high yield today and a growing dividend tomorrow.
Cashing in on the summer's Sun
Matt DiLallo (NextEra Energy): NextEra Energy has multiple ways to cash in on rising power demand. The company operates the country's largest electric utility (Florida Power & Light, or FPL), which provides electricity to about 5.9 million customers in Florida. It also owns one of the world's biggest clean energy businesses (NextEra Energy Resources), which supplies electricity to other utilities and large corporate buyers.
FPL benefits from higher electricity demand when customers crank up the AC on hot summer days. It also benefits from its ability to harness the Sun's power to produce electricity. Last quarter alone, it added more than 1.6 gigawatts (GW) of new, cost-effective solar energy. FPL now owns and operates 6.4 GW of solar, the largest utility-scale solar portfolio in the country. The utility's low-cost solar operations are one reason its customers don't sweat heatwaves (their bills are 37% below the national average).
NextEra's energy resources segment is well-positioned to meet the country's growing demand for power. While it primarily sells electricity under long-term, fixed-rate power purchase agreements, rising prices will enable it to lock in higher rates as legacy contracts expire. Growing power demand also enables NextEra to build more renewable energy capacity.
The company expects strong, rising power demand to drive 6% to 8% adjusted earnings-per-share growth through 2027. That should give it the fuel to increase its dividend, which it has done every year for three decades. It currently expects to grow its payout by around 10% annually through at least 2026. That's a robust growth rate for a payout that already yields an above-average 2.8% (more than double the S&P 500's 1.3 % yield).
Duke Energy has the power to potentially generate strong returns
Neha Chamaria(Duke Energy): Duke Energy is among the largest electric utilities in the U.S., with a customer base of nearly 8.2 million across six states. Importantly, some of these are among the fastest-growing states in the U.S., including Florida, North Carolina, and South Carolina. Florida and South Carolina were, in fact, the two fastest-growing states in the U.S. in 2023, clocking 1.6% and 1.7% growth, respectively, according to the U.S. Census Bureau.
Duke Energy projects 1.5% to 2% annual growth across all its jurisdictions between 2023 and 2028, driven by economic growth led by high-potential industries like artificial intelligence, chip manufacturing, data centers, electric vehicles, automakers, and pharmaceuticals. Florida and the Carolinas were also among the leading states in terms of migration last year, which partly explains why Duke Energy added 195,000 new customers in 2023, also its largest ever.
Duke Energy's profile alone, therefore, positions it well to benefit from a potential surge in power demand. The company isn't resting on its laurels, though -- it plans to invest a whopping $73 billion to expand and modernize its infrastructure through 2028 to grow its rate base steadily. The utility expects its investments to boost adjusted earnings per share by 5% to 7% through 2028, which should also support dividend growth.
The stock yields 4% today, and the utility believes it should be able to maintain its yield in the coming years. Overall, that makes Duke Energy a compelling stock to buy if you want to cash in on rising power demand.
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Matt DiLallo has positions in NextEra Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Dominion Energy. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Dominion Energy and Duke Energy. The Motley Fool has a disclosure policy.
