The solar industry has had its share of ups and downs over the past decade, particularly as manufacturers have had to lower costs to stay competitive. But falling costs have made solar energy more competitive in the global energy market, which has driven a rapid increase in installed solar projects.
As the industry grows, a key segment is solar project owners. These are ultimately the financiers of solar projects around the world, and they also happen to be some of the best dividend payers in energy today. Right now, TerraForm Power (NASDAQ:TERP), NextEra Energy (NYSE:NEE), NextEra Energy Partners (NYSE:NEP), and Atlantica Yield (NASDAQ:AY) are my top dividend picks in the solar industry.
This was one of the first yieldcos on the market and got into financial trouble when its parent company SunEdison went into bankruptcy. But today it's run by Brookfield Asset Management and has a much more conservative and sustainable dividend and growth strategy.
For starters, the company owns 3,748 megawatts (MW) of wind and solar projects with 1,345 MW being solar. The solar assets range from rooftop solar systems on homes and commercial buildings to some of the largest solar farms in the world. The portfolio of assets has a weighted average of 13 years left on its contracts to sell energy to customers like utilities, corporations, and governments. That creates the stable cash flow that funds the dividend.
Over time, TerraForm aims to keep 15% to 20% of its cash available for a distribution to pay down debt or acquire new projects. Growth is expected to lead to a 5% to 8% distribution increase annually. With a starting dividend yield of 4.8% today, that's a high and stable payout for investors.
The NextEra family of companies
Utility NextEra Energy is the largest wind and solar generating company in the world. It has its regulated utility, a power producing division, and its subsidiary NextEra Energy Partners.
Under its energy resources division, a power-plant developer, NextEra Energy owns 3 gigawatts (GW) of solar production and is planning to invest in another 3.8 to 7.3 GW of solar by the end of 2022. This will help maintain its spot as the biggest renewable energy owner in the world and quickly increase its base of solar assets.
NextEra Energy Partners is a subsidiary that owns renewable-energy projects with long contracts to sell electricity to utilities, just like TerraForm Power, and its portfolio consists of 750 MW of solar and 4,575 MW of wind assets right now. It relies more heavily on wind today, but the solar portfolio is growing quickly. The yieldco has 16 years of remaining contract life on existing assets and says it has visibility to 12% to 15% annual dividend growth through the end of 2024.
NextEra Energy's primary business is as a utility, and that's why it has a relatively low 2.2% dividend yield, but the diversity of the business is a strength for investors. NextEra Energy Partners has a 4% dividend yield, and if its growth targets are met, this could be a great payout for investors for decades.
The solar yieldco play
Atlantica Yield is a yieldco structured similar to TerraForm Power and NextEra Energy Partners. It owns renewable-energy assets along with a small number of natural gas, transmission, and water assets. Nearly 90% of the company's 1,496 MW of renewable energy assets are solar, with wind accounting for the rest.
The average contract duration remaining on the company's assets is 18 years, longer than the companies I've highlighted above, which provides additional stability in cash flow. And the dividend was just increased by 18% to $0.40 per share, or an annualized yield of 6.7%. The high dividend may make it hard for the company to acquire growth projects with stock, one way yieldcos fund growth, but if you're just looking for a high-yield dividend payout with less certainty for long-term growth, this is it.
Solar's dividend stocks
There aren't a lot of solar stocks that pay dividends. But these utilities and yieldcos are an emerging part of the energy market, and they're financing the solar industry's growth while paying large dividends to investors. If you're looking for payouts that can stand the test of time, these are four great stocks for your portfolio.