NextEra Energy (NEE), the parent company of Florida Power & Light Company, hiked its dividend by 10% as expected last month. Based on its historical dividend yield, NEE stock could be worth 7% to 30% more, making it attractive to value investors. Moreover, shorting out-of-the-money (OTM) put options can provide good short-term yield income.
NEE closed at $73.55 on Friday, March 14, down from a peak on March 16 of $76.16, but up from a recent low of $66.96 on January 13. I previously discussed how cheap the stock was on Feb. 12: “Investors Bullish on NextEra Energy - Huge Unusual Call Options Activity - Dividend Hikes Likely.” This article will update those developments.
Dividend Hikes and Historical Yields
NextEra Energy reported in its Jan. 24, 2025, earnings release for 2024 that it expected to raise its dividend by 10% annually through 2026 from its 2024 base. It previously had said this in earlier 2024 quarterly press releases as well.
Sure enough, on Feb. 14, the company raised its quarterly dividend per share (DPS) by 10% to 56.65 cents (i.e., $2.226 annually), as I predicted in my Feb. 12 Barchart article.
Now NEE stock has a slightly higher than 3.0% dividend yield:
$2.266 annual DPS / $73.55 = 0.0308 = 3.08% yield
However, as I previously argued, this is well below its historical yield average. For example, Morningstar reports that its average five-year dividend yield has been much lower at 2.20%.
Similarly, Seeking Alpha reports that its average 4-year yield has been 2.37%. The average of these two long-term yields is 2.285%.
In fact, even in the last 12 months, its average has been lower at 2.87% according to Morningstar.
NEE Stock Price Targets
As a result, we can set price targets based on its average yield. For example, using the closest 2.87% yield average, here is how we can set a price target for :
$2.266 DPS / 0.0287 average yield = $78.95 target p/sh
$78.95 target / $73.55 price today = 1.0734 = +7.34% upside
Moreover, using the 2.285% long-term yield average, NEE is worth over 34% more:
$2.266 / 0.02285 = $99.17
$99.17 / $73.55 = 1.3483 = +34.8% upside
Just, to be conservative, using Morningstar's 2.37% 5-year average results in a price target of $95.61, +30.0% higher.
So, the price target for NEE stock is between $78.95 and $95.61, or about $87.28, +12.89, or 18.7% higher on average. The problem is there is no set time frame during which this might happen.
One way to play this is to set a lower price target and get paid while waiting for the stock to fall. This can be done by shorting out-of-the-money (OTM) put options in nearby expiry periods.
Shorting OTM Puts
For example, look at the April 25, 2025, expiration period put option chain, a little over a month from now (41 days to expiry - DTE). It shows that the midpoint premium for the $71.00 strike price, 3.47% below Friday's price, has a premium of $1.79 per put contract.
That means that a cash-secured short seller of this put contract can make an immediate yield of 2.52% (i.e., $1.79 / $71.00 = 0.0252).
Here is what that means. An investor who secures $7,100 in cash or buying power with their brokerage firm can do this trade. That cash acts as collateral to buy 100 shares at $71.00. The account will then immediately receive $179.00 if the trade is performed at $1.79 in the midpoint.
Note that this also sets a lower breakeven buy-in point for the cash-secured short-put seller. For example, $71.00 - $1.79 income received equals a breakeven buy-in price of $69.21.
That means that if NEE stock falls to $71.00 or lower on or before April 25, the account will be assigned to buy 100 shares using the $7,100 collateral. However, this also means that the investor now will make a higher yield:
$2.266 annual DPS / $69.21 breakeven buy-in = 3.27%
Note also that this provides an investor a very good annualized expected return (ER) even if the account is not assigned to buy the shares. For example, the delta ratio if 34.5%, indicating that based on past trading patterns there is only slightly over a one-third chance of getting assigned. Conversely, this means there is a 2/3rds chance of making a profit, having the option expire worthless.
As a result, if the investor can repeat this trade every 41 days for a year (i.e., 365/41 = 8.9x), the expected return (ER) is:
8.9x 0.0252 = +22.48% ER
That is equivalent to a price target of NEE stock rising to $90.00 per share over the next year, without having to buy the shares.
Downside Risks
Investors should study the downside risks before doing this kind of risky short-put option play. For example, the Barchart Options Assignment tab helps investors understand these risks. In addition, the Options Trading Risks section helps investors understand the risks with options.
For example, it's possible that the investor could end up with an unrealized capital loss. That would happen if the stock falls below $71.00 and the account is assigned to buy the shares and it falls below the breakeven price of $69.21 per share.
That is why it is always important to only short out-of-the-money puts for a stock that is worth buying for the long term. The investor may end up owning it for a good while. However, in this case, it looks to be a good bet, as I have shown.
