NextEra Energy Partners (NEP -0.47%) and TC Energy (TRP -0.54%) both offer yield-seeking investors attractive dividend payouts. The clean-energy-focused NextEra currently yields 3.8%, while pipeline giant TC Energy pays 4.4%.
However, since most investors probably don't want to own too many energy stocks in their portfolio, they likely will only want to hold one of these high-yielders. Here's a look at the bull and bear cases for buying either one.
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The case for and against NextEra Energy Partners
NextEra Energy Partners is coming off a decent year. The renewable energy producer's stock gained about 22% in 2019 while generating a total return of 27.5% after adding in its dividend, which fell just short of the red-hot S&P 500's 31.5% total return. One factor powering the company's solid performance were two needle-moving acquisitions. This not only bought some more renewable energy assets from its parent, NextEra Energy, but it also purchased a natural gas pipeline company. Because of that, NextEra Energy Partners has enough power to support its plan to grow its high-yielding dividend by 12% to 15% through the end of this year.
The company believes it can continue buying renewable assets from NextEra, given its parent's rapidly expanding portfolio. In its view, it can make enough deals to support annual dividend growth of 12% to 15% through at least 2024. Add to that the fact it has a conservative dividend payout ratio of 70% and a low valuation of less than 10 times earnings, and there's a lot to like.
However, one knock against NextEra Energy Partners is that it has a weaker balance sheet, giving it a sub-investment-grade credit rating. Because of that, it has less flexibility and higher costs when it comes to borrowing money, which has forced it to get creative when paying for acquisitions. Speaking of which, dealmaking is the main power source of the company's dividend growth strategy. As such, if it can't access the money it needs in the future, it might not deliver on its bold dividend growth plan. Finally, the company sells a meaningful portion of the renewable energy it produces to the bankrupt utility PG&E, which could negatively impact its cash flow if the court rules that PG&E can alter its power purchase agreements.
The case for and against TC Energy
Canadian pipeline giant TC Energy, meanwhile, is coming off an even stronger year. Its stock zoomed 49.3% in 2019, while its total return was an impressive 56.3%. However, even with that big-time rally, shares of the pipeline giant still trade at a relatively attractive price due to its underperformance in previous years.
One factor fueling last year's surge was the company's expansion program, which helped grow its cash flow by 14% through the third quarter. Meanwhile, TC Energy has a multibillion-dollar backlog of additional growth projects, which should come online over the next several years. Those expansions should give the company the fuel to increase its high-yielding dividend by 8% to 10% through 2021 and by 5% to 7% annually after that.
TC Energy can fully finance its capital program through retained cash after paying its dividend (due to its conservative payout ratio) and new debt thanks to its top-notch balance sheet. The company's ability to internally finance growth is a notable improvement from previous years, which saw it sell assets to fund expansion projects so that its credit profile didn't weaken.
While TC Energy has low risk in the near term, rising climate change concerns are a longer-term headwind for the company. It's becoming increasingly difficult for pipeline companies to build new projects due to opposition from environmentalists and local stakeholders. Because of that, the company could find it more challenging to develop new pipelines in the future, which could negatively impact its ability to continue growing its dividend.
Verdict: TC Energy is the lower-risk buy
Both energy companies are excellent choices for income-seeking investors. However, NextEra Energy Partners is a bit riskier in the near term than TC Energy, given its weaker balance sheet and reliance on acquisitions to power growth. While NextEra Energy Partners offers higher reward potential, TC Energy seems like the safer bet for investors looking for a growing income stream, making TC Energy the better buy right now.
