Utility investors have long been accustomed to receiving large dividends from their common stocks. However, when investing for income many investors fail to recognize there may be better choices to achieve current income. In this article, we'll take a look at an issue from NextEra (NEE), the Junior Subordinated Series F Debenture due 2069 (NEE-F, ticker may differ slightly depending on the broker you use) to see if it could be a good fit for your income portfolio.
NEE-F is an exchange traded debt security, meaning that it is a traditional debt issue but it is traded on a stock exchange in small lots of $25 instead of on a traditional bond exchange in larger lots, such as $1,000. This allows smaller investors to purchase NEE-F and also allows for much greater liquidity. Apart from being exchange traded, NEE-F is just like any other debt issue. It pays regular quarterly interest distributions and trades independent of the common stock.
Issued at $25, NEE-F pays annualized interest distributions of $2.1875, good for a coupon yield of 8.75%. Shares are actually trading at a slight premium to the issue price, $25.50 as of this writing, so the current yield is a bit lower at 8.6%. That is still a tremendous yield and nearly three times the yield of NEE common shares. While NEE-F doesn't offer the capital appreciation potential of the common, it does offer a tremendous source of income that should be much safer in the event of a market selloff.
While there are many great characteristics of NEE-F, there are also some risks. First and foremost, NEE-F can be called at any time after March 1st of this year. While no one knows if NEE intends to do this, you could potentially buy this security today and be called away after receiving only one interest payment. This is certainly not ideal and as such, if this bothers you, you may want to wait until after March 1st to see if NEE is going to redeem this issue immediately upon the call date passing. The call date keeps me from jumping all over NEE-F but like I said, it may not be called anyway.
Assuming it doesn't get called, NEE-F will mature on its own in 2069 when the underlying debentures mature. If NEE chooses not to redeem this issue early you could potentially own this issue forever as 55 years is likely out of most of our investment horizons. The point is that if NEE doesn't call NEE-F, it could be a great source of income for a very long time.
Of course, there is also interest rate risk associated with NEE-F as there is with any other interest bearing security. In particular, NEE-F has maturity risk as well because it doesn't mature for such a long time. No one knows what the world will look like in 55 years or if NEE will still exist and as such, there is some additional risk in owning a debt issue like this.
Unfortunately, since NEE-F is a debt issue and not a preferred stock, it is ineligible for the preferential dividend tax treatment. This means that any distributions received from NEE-F in a taxable account will potentially carry a much higher tax rate than a comparable dividend that is eligible for the favorable treatment. In a retirement account it wouldn't matter but if you are holding NEE-F in a taxable account, depending on your tax situation you could see a materially lower after-tax yield than you would otherwise. You must understand the implications of the tax treatment of this issue for your particular situation before pulling the trigger.
NEE-F is a decent issue for gaining income from a stable payer. The only reason I say it's decent and not great is because of the call date. With the stable payer in NEE and the terrific current yield, the call date is the only real negative I see with NEE-F. Unfortunately, it could turn out to be a sizable negative as holders may be called away in as little as six weeks from today. Assuming that doesn't happen NEE-F could provide holders with a great source of high yield for many years to come. If you are comfortable with the idea of being called away in March then you could get long NEE-F today but I would suggest waiting to see if the issue is called immediately upon the call date passing before initiating a position.
Additional disclosure: I may initiate a position in NEE-F at any time.