The best high-yield stocks share three things in common: They generate stable cash flow, have a conservative dividend payout ratio, and boast a sound balance sheet. Those three characteristics increase the likelihood that a company can continue paying out a lucrative income stream for years to come.
Two that fit the profile are renewable power generators Brookfield Renewable Partners (NYSE:BEP) and TerraForm Power (NASDAQ:TERP). Because of that, both companies have the foundations needed to sustain their lucrative payouts over the long term, making them great high-yielding stocks to buy.
Steady cash flow from the original renewable
Brookfield Renewable Partners is one of the largest publicly traded renewable power companies in the world. It is a global leader in generating hydroelectric power, which comprises about 80% of its renewable portfolio. Brookfield sells more than 90% of the electricity it produces under long-term contracts to utilities and other end-users, which supply the company with very stable cash flow that it uses to support its 6.4%-yielding distribution to investors.
Two other factors put that high-yielding payout on solid ground. First, the company typically only pays out about 70% of its cash flow in support of the dividend, which is a healthy level for a high-yield stock. In addition, the company has an investment-grade balance sheet backed by conservative leverage metrics.
That sound financial profile gives Brookfield the financial flexibility to invest in growing its renewable power platform. It currently has several hydropower projects under construction in Brazil as well as wind farms in Europe that will help increase cash flow in the coming years. Furthermore, the company has a history of making acquisitions that move the needle and recently bought a stake in TerraForm Power as well as that company's former sibling, which will help expand cash flow in the coming years. That growing cash flow stream positions Brookfield to increase its payout at a 5% to 9% annual pace over the next several years.
A bright future powered by the wind and sun
TerraForm Power owns a large portfolio of solar and wind power assets, mainly in North America and Europe. These renewable power facilities also generate stable cash flow since the company has secured long-term contracts locking in the pricing on 95% of the power it expects to produce. That steady cash flow helps support TerraForm's 7.1%-yielding dividend.
Also, TerraForm has an improving financial profile. While the company doesn't currently have an investment-grade balance sheet, it's quickly working toward that goal and should hit its leverage target shortly. In the meantime, it expects its dividend payout ratio to be between 80% to 85% of cash flow over the long term, though it will be below the low end of that range in the near term.
That solid financial foundation is an important factor in driving the company's view that it can grow the dividend at a 5% to 8% annual rate through 2022. Also supporting that outlook is the upcoming acquisition of Saeta, which is a wind and solar power company in Europe. That deal will bolster TerraForm's cash flow and balance sheet, which along with some internal growth initiatives, positions the company to grow the dividend at a steady pace for the next five years.
Excellent ways to generate income over the long term
Brookfield Renewable and TerraForm Power have all the characteristics needed to support a high-yielding dividend payout. Better yet, with ample growth up ahead, these companies also share the same features found in many of the best dividend growth stocks. That positions them to generate a growing income stream for investors, making them excellent companies to buy and hold for the years ahead.