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Dividends that once seemed safe in the energy sector have been obliterated in the last two years. Major energy names like Kinder Morgan, Seadrill, and Consol Energy are just some of the dividend stocks that looked safe for investors just a few years ago and are now paying much lower dividends -- or nothing at all.
While a lot of energy stocks are still facing turmoil, there's a growing type of investment dividend investors should love: yieldcos.
8point3 Energy Partners
8point3 Energy Partners (CAFD +0.00%) is the creation of SunPower and First Solar, the two largest solar project developers in the U.S. The company buys projects from its two parents that have long-term contracts (usually 20 years or more) to sell energy to utilities, providing a predictable stream of cash flows. This ensures a steady dividend for years to come.
The advantage 8point3 Energy Partners has over competitors is better technology than most solar companies and a dual sponsor structure that ensures the yieldco won't overpay for assets. The last point is key after SunEdison, which pioneered yieldcos, used two yieldcos as piggy banks ahead of its own bankruptcy.
You can find yieldcos with higher yields than 8point3 Energy's 5.9% dividend yield, but this company is set up for long-term dividend growth and has stable cash flows that dividend investors will love.
NRG Yield
NRG Yield (NYLD +1.20%) was really a pioneer in the yieldco space and it was structured slightly differently than other yieldcos. NRG Energy, the yieldco's parent company, included some fossil fuel plants along with wind and solar assets that would give the yieldco cash flow as well as the ability to use tax benefits itself rather than selling them to third parties. This structure led to some disappointment as wholesale prices for electricity dropped and wind assets underperformed expectations, which has led to the yieldco's decline in the past year. So, a lot of weakness is already priced into the stock.
Today, NRG Yield is one of the biggest and most stable yieldcos, with a 5.2% dividend yield -- and it looks ready to go on a buying spree. Within the last week, NRG Yield has announced a $150 million equity offering and a $350 million senior notes offering. Together, they give the company $500 million to buy renewable energy projects that may be cheap right now.
There are rumors NRG Energy is interested in buying assets from SunEdison's portfolio, which would likely be dropped down to NRG Yield. SunPower also recently said that investors were demanding higher returns on solar projects, which as a buyer would be good for NRG Yield's dividend stream.
As a yieldco buys more projects, it adds to dividend growth, assuming the projects are acquired accretively (which they should be). So, the latest offerings could be a sign of dividend growth on top of an already strong dividend yield.
NextEra Energy Partners
Another large and stable yieldco to consider is NextEra Energy Partners (NEP +0.30%). The yieldco is a product of the growing renewable energy portfolio at NextEra Energy (NEE +1.09%), which is driven by wind assets.
After acquiring 285 MW of wind assets in July, the company expects its dividend to grow to an annualized rate of $1.38 to $1.41 per share by the end of 2016. And management is confident the dividend will grow at 12% to 15% through 2020.
Like NRG Energy, NextEra Energy is adding renewable energy assets at a rapid pace and the NextEra Energy Partners yieldco is a key piece of the strategy. The company will continue to buy renewable assets and add to the dividend long-term. And with a 4.5% dividend yield implied by the end of year projections, there's a solid payout for investors and the opportunity for acquiring projects for growth.
