High-yield dividend stocks can be tempting for a variety of reasons for investors, whether they're looking for cash flow or market-beating returns. But high yields can also be a sign of high risk, or the market's lack of confidence that a dividend payout will continue long-term. Seadrill and Kinder Morgan are just a couple of examples of energy stocks with high yields that ended up being very risky for investors.
But not all high-yield stocks are high risk. The advent of renewable energy yieldcos in the last decade has created a group of companies that have very low-risk business models and very high dividend payouts for investors. Here are my top picks for 2018.
NextEra Energy Partners
One of the leading yieldcos in the U.S. is NextEra Energy Partners (NEP 1.63%), an offshoot of utility NextEra Energy (NEE 1.42%). The company owns 3.1 GW of wind, 600 MW of solar, and 542 miles of natural gas pipelines (fossil fuel assets added to increase diversification and cash flow).
The renewable energy assets in NextEra Energy Partners' portfolio have on average 18 years left in their power purchase agreements, primarily with investment grade off-takers like utilities. This ensures cash flows that ultimately fund a dividend yield of 3.9% at Friday's closing price.
What should really excite high-yield investors is that the dividend is going to grow. Management has a pipeline large enough to grow the dividend 12% to 15% through 2022. The implication is that the dividend could be $3.16 per share at the end of 2022.
But it gets better. Due to tax rules that allow companies to return capital to investors, NextEra Energy Partners' dividend should be tax-free for the next 8 years or more, and the company itself isn't expected to pay significant taxes for more than 15 years. High-yield, low tax, and long-term contracted cash flows are just what investors should be looking for.
Brookfield Renewable Partners
Brookfield Renewable Partners (BEP 2.23%) is a yieldco focused on hydroelectric plants. The company owns 16,000 MW of capacity at 820 generating facilities around the world, 80% of which is hydro with most of the remainder coming from wind. While hydro facilities don't come with the same long-term contracts as wind and solar projects, they have a long operating history and low risk given that their source of fuel is water.
What makes Brookfield Renewable Partners a little unique among yieldcos is that it doesn't have a high growth target for its dividend. Management hopes to grow the dividend 5% to 9% each year, resulting in total returns of 12% to 15% if excess cash is used to buy new assets. With a starting dividend yield of 5.6% today, this is the kind of dividend stock that should be at the foundation of your portfolio.
8point3 Energy Partners
If you're looking for a solar yieldco, consider 8point3 Energy Partners (CAFD), a creation of solar giants First Solar and SunPower. It owns 946 MW of solar projects across the U.S., with 19 years of remaining power purchase agreements to sell electricity to utilities.
8point3 Energy Partners' current dividend yield of 7.4% is among the highest in the industry, in part because it's not likely to be a growth dividend much longer. Both First Solar and SunPower are reducing their project development businesses, and have decided to try to sell 8point3 Energy Partners as a result.
For investors, if there isn't a buyout the dividend is a good enough reason to own the stock, but the buyout possibility provides some upside. A buyer could acquire the whole company for a premium, or there could be a partner who buys out First Solar and SunPower and brings in growth projects of its own. That could drive the dividend higher long-term. No matter what happens, 8point3 Energy Partners is a low-risk, high-yield dividend stock I'm comfortable having in my portfolio.
The final yieldco on my list is TerraForm Power (TERP), a company that's gone through some ups and downs in its short history. The company was formed by SunEdison, which went bankrupt in 2016, throwing the yieldco into turmoil. But last year Brookfield Asset Management (BAM 0.17%), which also runs Brookfield Renewable Partners, took over as the sponsor and brought stability to the company.
TerraForm Power has 2,606 MW of wind and solar projects that have an average of 19 years remaining on their power purchase agreements. Brookfield has said that it plans to pay out 80% to 85% of cash available for distribution, resulting in a dividend of $0.72 per share in 2018, or a yield of 6.7% per share. And the dividend is expected to grow 5% to 8% annually, primarily through organic growth. Long-term, this is a yieldco that could become a big winner for renewable energy investors.
Yieldcos are the great new energy stocks
NextEra Energy Partners, Brookfield Renewable Partners, 8point3 Energy Partners, and TerraForm Power are all high-yield stocks that don't have the same level of risk usually associated with similar yields. In some cases, they even come with dividends that don't require investors to pay taxes (check with your tax advisor), increasing the overall return for investors. If you're looking for yield without the risk, this is where I would start.