Who says you can't get a high yield investment in the renewable energy business? Sure, the solar and wind power businesses are growing at breakneck paces and require loads of capital to be plowed back into the business, but there are still opportunities for high-yielding investments in this industry if you look in the right places.
So we asked three of our contributing investors to each highlight a stock they see as a great investment in the renewable energy industry with an enticing payout. Here's why they picked 8point3 Energy Partners (NASDAQ:CAFD), Brookfield Renewable Partners (NYSE:BEP), and Pattern Energy Group (NASDAQ:PEGI).
Get paid by the sun
Matt DiLallo (8point3 Energy Partners): Solar-focused yieldco 8point3 Energy Partners pays investors very well, and currently yields a red-hot 7.3%. Further, the company is on pace to increase that payout by 12% this year, due in large part to previously completed acquisitions. Meanwhile, the payout is on solid ground since 8point3 generates relatively predictable cash flow by selling the power produced by its solar sites under long-term contracts with credit-worthy customers.
That said, distribution growth beyond 2017 is a bit cloudy at the moment since 8point3's sponsors, First Solar and SunPower, are currently in the middle of a strategic review to determine what to do with their stake in the yieldco. The problem with this is that 8point3 has been relying on them to supply it with a steady flow of acquisition opportunities to drive growth, which could go away if both sell their stakes. While that's certainly a potential risk, as is a complete buyout that would take it private or merge it with another entity, a sale to the right new owner could also bring with it a new set of opportunities, especially if a utility took over.
8point3 is a riskier option due to the current uncertainty. However, it has the potential to deliver a high current yield that could continue growing at a fast pace in the future if the right sponsor steps up.
A wider range of investment opportunities
Tyler Crowe (Brookfield Renewable Partners): Many of the higher yield investment opportunities in the renewable energy industry are limited to the United States. That isn't necessarily a bad thing, but the electricity market in the U.S. is a mature one where most growth comes from replacing old power generating facilities. When you look outside the U.S., though, there are much more dynamic markets where electricity demand is growing at much faster rates, and that is part of the reason that Brookfield Renewable Partners looks like a compelling high-yield investment.
As it stands today, about one-third of the company's portfolio of assets are outside North America, and with the recent acquisition of TerraForm Global still being added to the fold, it will give Brookfield a toehold in both the Indian and Chinese electricity markets where demand for new capacity is significantly larger than in North America.
Of course, the terms "growth" and "high-yield" rarely go together well. In this case, though, Brookfield looks like it has the financial strength and management team up to the task. Management has been able to maintain an investment grade rating -- not an easy task in a capital-intense commodity market -- and has been opportunistic with its asset purchases. Its recent purchase of TerraForm Power and TerraForm Global -- both distressed assets -- is a great example of this. The combination of buying renewable power assets with long life contracts, a modest debt load, and opportunistic buying is why Brookfield has been able to generate 16% annualized total returns for more than a decade.
Generating dividends for investors no matter which way the wind blows
Sean O'Reilly (Pattern Energy): Investors would be hard-pressed to find a renewable energy stock that is more true to the moniker than Pattern Energy. The independent power company owns a portfolio of 20 wind power facilities, the sum of which generates 2,736 MW of electricity. These facilities are dotted across the United States, Canada, and Chile. Once built, electricity is sold to local utilities through long-term contracts. The average contract life of the company's current portfolio is 14 years -- so investors can rest easy knowing its 6.8% dividend yield is secure.
Like its solar yieldco cousins, Pattern Energy's wind turbines generate stable, long-term cash flow. There is strong reason to believe that it will continue to grow in the years ahead. Governments the world over continue to demand increased renewable energy usage, and wind energy is just about as renewable as it gets. Utilities are quickly getting on board. Pattern's business also remains a good one, producing a more-than-healthy free cash flow margin of over 70% in Q2 2017. Contract guarantees and enormous profits margins continue to pay dividends (literally) for investors. The latest of which was an increase to $0.42 per share for Q3 2017 ($1.68 on an annualized basis.) With a current dividend yield of 6.9% Pattern Energy is a must-consider stock for any Foolish investor looking for high-yield renewable energy stocks.
Matthew DiLallo owns shares of Brookfield Renewable Energy Partners and First Solar. Sean O'Reilly has no position in any of the stocks mentioned. Tyler Crowe owns shares of 8point3 Energy Partners and First Solar. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.