The next decade will be a big one for renewable energy. Today, wind and solar provide about 8% of all electricity consumed in the United States. But they're expected to reach a combined 15% to 20% of the nation's generation mix in the next 10 years thanks to increased capital investments and rapidly improving technology.
That means there's a whole lot of money to be made for the companies cashing in on the trend. The same can be said for investors when those renewable businesses divert excess cash flow into the pockets of shareholders. Luckily, there are quite a few solid dividend stocks to buy in renewable energy. Here's why investors should take a closer look at TerraForm Power (NASDAQ:TERP), Pattern Energy (NASDAQ:PEGI), and NextEra Energy (NYSE:NEE).
New ownership means new growth prospects
Wind and solar asset manager TerraForm Power endured a rocky several years following the bankruptcy of its former parent, but ended 2017 running into the arms of Brookfield Asset Management. The new parent has an impeccable track record of creating shareholder value and deep pockets. They've wasted no time putting those advantages to work.
The renewable energy company has outlined plans to boost cash flow 6% per year through 2020 thanks to a combination of improved operational efficiency and higher-value contracts for its wind assets. TerraForm Power also expects to invest 15% to 20% of cash flow in the coming years, gobbling up new renewable energy assets while increasing its distribution at an annual clip of 5% to 8%. The current yield sits at 6.9%.
Meanwhile, Brookfield Asset Management provided a cool $500 million credit facility to TerraForm Power and the right of first refusal for up to 3,600 megawatts (MW) of wind and solar assets. Considering the company already owns 2,600 MW of renewable generation capacity, it appears poised to start its new life with a considerable pipeline of growth potential.
That said, shares are down 9% year to date. That's despite a strong showing in the first quarter of 2018 and an incredible liquidity position that will allow it to deliver on its growth plans with minimal outside funding. Therefore, long-term investors looking for income or growth should see this as a great opportunity to buy TerraForm Power.
This wind project owner pays a 9.2% yield
Yes, you read that correctly. Pattern Energy pays investors over 9% just to own the stock. The yieldco's business model is pretty simple. It takes equity stakes in wind farms across the globe and generates cash flow from selling the electricity generated in long-term contracts. As the yield indicates, it can be a lucrative strategy when executed properly.
Pattern Energy ended the first quarter of 2018 with ownership of 2,864 MW of wind and solar capacity that generated 2,127 gigawatt-hours (GWh) of electricity. That represented year-over-year electricity generation growth of 4%, which delivered operating cash flow of $27.8 million and cash available for distribution (CAFD) of $43.1 million -- just enough to cover the quarterly payout totaling $41.4 million.
While that high payout ratio limits the company's ability to acquire assets and grow in the near term, management has managed its portfolio to maximize cash generation. The idea is to strategically sell assets for high multiples of CAFD (example: 12 times the metric), then use the proceeds to acquire projects at purchase prices representing lower multiples of CAFD (example: 10 times the metric). The bigger the difference, the more cash that can be generated from the same invested capital.
For instance, Pattern Energy recently sold a project in Chile for $67 million, which management says represents a CAFD multiple higher than it has paid for projects in the past. The proceeds could be used to acquire some of the 935 MW of wind projects currently under construction that the company has the right of first refusal to acquire. If any of the price tags represent favorable cash generation potential, then investors can bet management will pull the trigger. That bodes well for this high-yield renewable energy stock going forward.
America's top wind and solar supporter
NextEra Energy only pays a 2.8% dividend yield -- by far the lowest of trio presented here -- but it makes up for that with a mammoth renewable energy portfolio. It owns 14,000 MW of wind power and 2,300 MW of solar. In fact, it's the largest owner of both wind power (boasting 16% of the country's installed capacity) and solar power (11% of the country's installed capacity) in the United States.
That portfolio has allowed EPS to grow at an annual clip of 8.1% since 2005, while the dividend has grown at 8.9% per year over that span. But it's just the beginning.
The long-term growth strategy looks to leverage leadership positions in wind and solar while continuing to provide low-cost energy to its utility customers in Florida and ample cash flow to its shareholders. NextEra Energy plans to add up to 5,300 MW of wind and solar from 2017 to 2018, but that pales in comparison to the renewables pipeline of its subsidiary NextEra Energy Resources, which stood at 28,000 MW at the beginning of May. By 2020, the company expects to grow that to 40,000 MW.
The near-term expansion plans alone have given management the confidence to expect dividend increases of 12% to 14% per year through 2020 -- and that doesn't account for the most significant ramp up in capital investments expected in the early 2020s. Simply put, this utility is a top renewable dividend stock to own for any portfolio.
It's pretty easy being green
These three dividend stocks prove that renewable energy can be a lucrative investment space. Whether investors are interested in the high yields of Pattern Energy and TerraForm Power, or the world-leading portfolio of NextEra Energy, there's something for every portfolio and every wealth-building strategy. Given the expected growth rates of renewable power generation in the next decade, can you really afford to overlook the opportunity?