The best dividend stocks share two common characteristics. First, they pay out a meaningful portion of their cash flow -- 41% to 71% on average -- which supports an above-average yield. Second, they carefully reinvest their remaining cash into expanding their business, which gives them the growing cash flow stream needed to sustain a steadily rising dividend. Companies that consistently reward their investors with a generous and growing dividend have historically outperformed their stingier peers.
That's why NextEra Energy Partners (NEP 0.54%) looks like a dream stock for dividend investors. Not only does the renewable-energy company offer an attractive current yield of more than 4%, about double the payout of the average stock, but it expects to increase its dividend at a 12% to 15% annual rate through at least 2023, which is well above average.
Check out the latest NextEra Energy Partners earnings call transcript.
A solid financial foundation
Utility giant NextEra Energy (NEE 0.49%) formed NextEra Energy Partners a few years ago to help facilitate its clean-energy expansion efforts. NextEra has been steadily selling not only wind and solar assets but natural gas pipelines to its affiliate. That has enabled NextEra Energy Partners to steadily grow its portfolio of cash flow-generating assets, all backed by long-term, fixed-fee contracts. As a result, the company has been able to steadily increase its dividend to investors, boosting it an impressive 140% overall since its initial public offering in 2014.
NextEra Energy Partners has been able to deliver this high-powered growth even as it has maintained a solid financial profile. While the company doesn't have an investment-grade credit rating, its leverage metrics are within its target range. Meanwhile, it has a more conservative payout ratio than most yield-focused peers, as it covers its dividend by more than 1.2 times, which gives it a payout ratio of less than 80%. That enables the company to generate some excess cash so that it has the financial flexibility to make more acquisitions.
Meanwhile, its relationship with NextEra Energy has enabled the company to structure deals in unique ways so that it can continue growing at a high rate without stretching its finances too thin. Last year, for example, the companies were able to partner with leading asset manager BlackRock (BLK 0.20%) on a $1.275 billion deal. BlackRock provided NextEra Energy Partners with $750 million in funding at a low interest rate that it can redeem in the future at a fixed price. The transaction will help support NextEra Energy Partners' dividend growth plan without having a negative impact on its financial profile.
A large pipeline of growth opportunities
With last year's acquisition, NextEra Energy Partners has the cash flow necessary to continue increasing its distribution to investors at a high rate for at least the next year. Meanwhile, the company recently sanctioned a $115 million project to expand the capacity of its natural gas pipeline system. The company expects this investment to generate strong returns, giving it more cash to support the dividend.
In addition to the growth the company has already locked in, NextEra Energy Partners has ample opportunities to continue growing its portfolio and cash flow in the future. Its parent NextEra Energy, for example, has a substantial amount of renewable-energy assets as well as natural gas pipelines that it can steadily drop down to the partnership over the coming years. Those assets alone could support the company's dividend growth plan through 2023.
Meanwhile, the company can also pursue additional organic growth projects such as continuing to expand the capacity of its existing pipelines, investing in new pipeline construction projects such as those that NextEra is currently building and developing, and repowering older wind turbines with newer, more powerful ones. Finally, the company could pursue third-party acquisitions of both natural gas pipeline assets and renewable-power generating facilities. As long as NextEra Energy Partners has access to financing, it can continue growing its portfolio, cash flow, and dividend, since it has no shortage of expansion opportunities.
The power needed to generate big-time total returns
NextEra Energy Partners believes that its dividend growth plan will richly reward investors over the long term. In the company's estimation, the combination of its 4%-yielding dividend and 12% to 15% annual growth gives it the potential to generate total annual returns of 16% to 19%, assuming it maintains its current valuation multiple. That upside potential is what makes this stock a dividend investor's dream.