According to the International Energy Agency's latest World Energy Outlook, global renewable-power generation capacity is expected to double over the next 25 years. Driving this growth is a combination of climate-change fears and a massive reduction in costs that should power market-share growth for renewables from 23% today up to 37% by 2040.
While this rapid rate of expansion is ideal for growth-focused investors, it's also powering big dividends for income investors. Three great options for investors who want a renewable cash-flow stream are Enviva Partners (NYSE:EVA), Pattern Energy Group (NASDAQ:PEGI), and Brookfield Renewable Partners (NYSE:BEP). Our Foolish investors take a look at all three.
Biomass: The other renewable energy
Tyler Crowe (Enviva Partners): In terms of energy, "renewable" doesn't only mean solar and wind. It just means an energy source that can be renewed in a relatively short time. Using that definition, we can add biomass as a renewable energy, and that gives us an attractive high-yield investment to consider: Enviva Partners.
Enviva Partners specializes in manufacturing and processing wood pellets. While some people may know about pellet stoves for home heating, they're also a commonly used replacement fuel for coal-fired power plants. Wood pellets have been an effective way for power producers to lower CO2 emissions (it's 74%-85% less carbon intense than coal) in places where solar and wind options are less economically viable, like the United Kingdom and the Scandinavian countries.
Enviva is the largest manufacturer of wood pellets in America, and it has a lot of traits investors want in a high-yield investment. For one, the company has fee-based contracts in place for all of its production capacity for the next 9.8 years. Its debt-to-EBITDA ratio of 4.1 is a manageable load for a master limited partnership, and the company has been able to maintain a steady rate of distribution growth without paying out more than what has come in the door.
Enviva is still a young company -- it has its IPO in 2015 -- which means it has yet to establish a track record that many high-yield investors want to see before adding it to a portfolio. That said, Enviva has a lot going for it, and it should be on your radar.
Cash flow growth could drive this high yield even higher for years to come
Jason Hall (Pattern Energy Group): As quickly as solar capacity is growing around the world, wind energy is still a bigger piece of the global power-generation pie and is on track to continue growing bigger for decades to come.
For high-yield and growth dividend seekers, Pattern Energy is an ideal investment. To start, the company's 20 currently owned wind power facilities generate steady, predictable cash flows from their long-term contracts, supporting a dividend yielding 5.4% at recent prices. Second, a steady diet of acquiring new wind facilities at prices that generate per-share cash flow growth has allowed the company to increase the payout almost every quarter since 2014.
Bottom line -- Pattern Energy has two wonderful things:
- A business model that generates predictable cash flows to support a very solid yield.
- A decades-long runway to grow much bigger, and a history of delivering per-share cash flow growth from its expansion.
Finally, the company trades for between 13 and 15 times the company's guidance for 2017 cash available for distribution (a measure of cash flows), a reasonable price for the yield and growth prospects it affords. If it's potentially decades of growing dividend payments you're after, Pattern Energy is worth a look.
The definition of a high-yield cash flow stream
Matt DiLallo (Brookfield Renewable Partners): Hydroelectric and wind-power generator Brookfield Renewable Partners currently yields a gaudy 6.2%. Supporting that payout are long-term power purchase agreements that underpin its renewable-energy assets, which currently amount to 92% of its capacity and have an average remaining term of 17 years. Meanwhile, the company provides further stability to the distribution by only paying out about 70% of its annual cash flows and maintaining a conservative, investment-grade balance sheet backed by a low leverage ratio.
While Brookfield's contract portfolio locks in bond-like cash flow streams, the company still has plenty of upside. For starters, the bulk of its contracts have inflation escalators that enable it to raise rates alongside inflation. In addition, the company has an extensive pipeline of wind and hydro projects in development. Add in margin expansion opportunities, and Brookfield Renewable Partners estimates that it can organically grow cash flow by a 5% to 9% annual rate. That fully supports its plan to increase shareholder distributions by a similar 5% to 9% annual rate over the long term.
In addition to its healthy organic growth, Brookfield Renewable Partners has an excellent track record of acquiring high-quality renewable assets. The company currently targets spending $500 million to $600 million per year on acquisitions and already has several in the pipeline. For example, the company recently bought the largest pumped storage asset in the U.K., which provides critical backup power to the country. Meanwhile, it's in the process of investing in the recapitalization of wind and solar yieldco TerraForm Power (NASDAQ:TERP) and the privatization of sibling TerraForm Global (NASDAQ: GLBL). Brookfield expects to invest $500 million in these deals, which gives it a platform to expand into solar.
Add it all up, and Brookfield Renewable Partners provides investors with a low-risk high current yield that should increase at a healthy rate for years to come.