Alternative energy companies have become extremely strong dividend stocks at a time when traditional energy stocks have gotten riskier. We've seen dividend powerhouses from offshore drillers to pipeline owners reduce their payouts as oil prices have fallen, but alternative energy faces no such risk. In fact, the future is getting brighter for wind, solar, energy efficiency, and other alternative energy assets.
Here are five dividend stocks that energy investors should take a hard look at.
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Atlantica Yield
Formerly known as Abengoa Yield, Atlantica Yield (AY 0.77%) was one of the first yieldcos on the market. It owns 21 different assets with "1,442 MW of renewable energy generation, 300 MW of conventional power generation, 1,099 miles of electric transmission lines and 10.5 Mft3 per day of water assets." Projects are in diverse locations in Europe, Latin America, and the U.S.
Assets generate revenue from long-term contracts that have an average weighted remaining life of 21 years. 95% of those contracts are with investment-grade counterparties, providing stability of cash flows. The company has $5.3 billion in debt, but debt amortizes over time, and the remaining cash after servicing debt is used to fund a 5% dividend yield right now. After generating $171 million in cash available for distribution (CAFD) last year, the dividend of $1.04 per share on just over 100 million shares has room to move higher.
Pattern Energy Group
Pattern Energy Group (PEGI) is primarily a wind yieldco, but it also owns part of a project development business known as Pattern Development 2.0. This development business is what gives Pattern Energy Group a 10 GW pipeline of projects to buy long term. Acquired projects that are bought at a higher rate of return than the cost of capital (debt plus equity) will be additive to the dividend.
The stock's dividend yield of 6.6% is low enough to fund accretive projects and high enough to be attractive for investors. $152.5 million in projected CAFD in 2017 will grow as more projects from the 10 GW pipeline are added, giving this stock's dividend room for growth.
Brookfield Renewable Partners
Most yieldcos are focused on growing dividends by issuing new shares to fund acquisitions. In theory, if there are enough projects to buy, a yieldco could issue shares and debt, funding a growing dividend forever. Brookfield Renewable Partners (BEP 0.92%) takes a different approach, using its cash flows to grow organically. It aims to buy projects that have returns of 12% to 15% and then hopes to grow its dividend 5% to 9% annually.
The strategy of growing organically could lead to slower dividend growth than competitors, but it also offers more stability. We saw yieldcos like Abengoa and TerraForm Power lead to the collapse of their parent companies when yields rose, and it became impossible to buy projects that have returns higher than their cost of capital. Brookfield Renewable Partners will have no such problem, and with a 5.3% dividend yield, this is a rock-solid dividend for energy investors.
Energy yields can be safe again
If you're a dividend investor and you've been burned by energy stocks that once seemed safe, it may be time to take a look at these three yieldco stocks. Each one has long-term contracts with high-quality off-takers to buy renewable energy, which also provides opportunities for growth. In a world where alternative energy is a growing portion of our energy mix, these are the kind of stocks dividend investors should have in their portfolios.
