Owning dividend stocks can be one of the best ways to beat the market and generate a little income along the way. And energy stocks have long been an investor favorite for dividends.
But the last few years have shown more volatility in energy dividends than investors might want. Oil price volatility has affected everyone from oil drillers to marketers. Even utilities have fallen as far as going bankrupt. With these risks in mind, NextEra Energy Partners (NEP -0.85%), Xcel Energy (XEL 1.32%), and Hannon Armstrong (HASI -1.43%) have solid dividends in the energy industry today.
NextEra Energy Partners
Yieldcos -- companies that own assets with high levels of deprecation, resulting in non-operating losses but generate cash for dividends -- have gone in and out of favor for investors, but NextEra Energy Partners has stood the test of time. The company is a subsidiary of NextEra Energy (NEE 0.67%), one of the biggest utility companies in the country. This gives the company a stability few yieldcos have had before it.
NextEra Energy's involvement gives NextEra Energy Partners 21 gigawatts (GW) of backlogged renewable energy projects that can be sold -- or dropped down in industry parlance -- to the yieldco. To buy those assets, though, Next Era Energy Partners needs to use either debt or equity to fund these dropdowns. As long as the yieldco has a relatively low dividend, currently at a 4.1% yield, and a low cost of debt, it can keep buying dropdown assets at a relatively low cost of capital to drive growth.
As it stands today, NextEra Energy Partners has 5.3 GW of assets in the portfolio with an average of 17 years remaining in contracts to sell electricity to utilities. Because of the treatment of dividends as a return of capital to investors, at least the next eight years of dividends will also be tax-free. And with projects already in the portfolio and visibility of future dropdowns, management says it expects 12% to 15% dividend growth through 2023.
The utility business has been more unpredictable than most investors expected as rooftop solar eats into demand, and cheap natural gas challenges the economics of aging fossil fuel plants. Xcel Energy has the advantage of operating primarily in states where residential solar doesn't have much market share (Minnesota, Wisconsin, and Colorado) and demand has steadily grown.
Xcel has also been able to leverage the renewable energy assets in its territory to grow, while not running afoul of more renewable energy regulation. The company operates utilities with one of the largest concentrations of wind power in the country, expected to be 11.3 GW by 2021. Owning those renewable energy assets gets the utility out in front of regulation or customers preferring renewable energy (I buy 100% wind power from Xcel Energy). When combined with steady consumption growth in its areas of operation, the utility has the steady growth you see below.
Xcel doesn't have the biggest dividend, trading at a 2.7% yield right now. But the stability of its utility business along with its growing renewable energy portfolio makes it a great dividend stock to own long term.
Hannon Armstrong is lumped in with traditional yieldcos, but it's a different beast altogether. The company says it provides financing for infrastructure projects that "reduce carbon emissions and increase resilience to climate change." That can include anything from a large wind farm to an energy efficiency upgrade for a corporate partner.
It doesn't usually invest directly in renewable energy projects, instead buying underlying assets that present lower risks. For example, 22% of its $1.9 billion portfolio consists of land under solar projects, 17% is preferred equity in wind projects, and 31% are energy projects with government agencies. These asset classes each present a much lower risk than owning equity in a project, as yieldcos and utilities do.
Hannon Armstrong's dividend yield of 5% right now is a solid payback for a company presenting relatively low risk for investors. The company has shown a history of prudent investments, and it's providing a growing amount of financing that allows more sustainable projects to be built.
Big-time energy dividends
NextEra Energy Partners, Xcel Energy, and Hannon Armstrong all have their own strengths in energy, but one commonality is that they have predictable revenue streams years into the future. I think that's important in an era when oil and gas prices can rise and fall sharply based on the news of the day. For the foreseeable future, these dividends are as rock solid as it gets in the energy industry.