The global economy needs to invest trillions of dollars in the coming years to transition its power source from fossil fuels to renewables. There's a tremendous amount of growth ahead for the sector, which could enrich investors who own stocks of companies focused on this transition.
Three that have the potential to produce compelling returns are Atlantica Yield (NASDAQ:AY), Clearway Energy (NYSE:CWEN), and Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI). Not only do they have solid growth prospects, but all three also pay high-yielding dividends. That makes them intriguing options for income-seekers to consider putting on their watchlist.
A sustainable income stream
Atlantica Yield focuses on operating sustainable infrastructure assets. These include not only wind and solar power generating facilities but also natural gas power plants, electricity transmission lines, and water desalination plants. The company sells the power it produces under long-term, fixed-rate power purchase agreements and has long-term fee-based contracts in place for the capacity of its water and transmission assets. Those agreements provide it with very predictable cash flow, the bulk of which it pays out to investors via a dividend that currently yields 5.8%.
The company expects to grow that payout by 8% to 10% per year through 2022. Powering that plan is its ability to invest in the acquisition and development of additional sustainable infrastructure assets. Atlantica Yield has a large pipeline of opportunities in front of it thanks to its strategic relationship with Algonquin Power & Utilities, as well as organic expansion opportunities embedded within its existing portfolio. Beyond that, the company notes that the global economy will need to invest $10 trillion on new renewable energy assets and another $11 trillion on power transmission and distribution infrastructure by 2050 so that wind and solar can provide half of the world's power. Add to that the investment needed in water desalination, and Atlantica should have plenty of growth opportunities in the coming years, which should give it the power to keep increasing its high-yielding payout.
Getting back on track
Clearway Energy also owns a portfolio of wind, solar, and natural gas power-producing facilities. On top of that, it operates some district energy systems, which provide heating and cooling to several buildings from a central plant. The company sells the energy it produces as well as the warmed or chilled air to customers under long-term contracts, which provide it with a predictable cash flow stream. It uses a large portion of those funds to pay a dividend that currently yields 3.8%.
The company entered last year with the expectation that it would increase its payout by another 5% to 8%. However, it had to modify that plan after one of its largest customers, utility Pacific Gas & Electric, filed for bankruptcy protection. It ended up slashing its payout nearly 40% to conserve cash. That gave it the financial flexibility to continue acquiring clean energy assets. Those transactions have the company on track to grow its cash flow by more than 18% this year. That growth, along with an eventual resolution of the Pacific Gas & Electric bankruptcy, should enable Clearway to repower its dividend growth engine soon.
A different way to collect a renewable income stream
Hannon Armstrong Sustainable Infrastructure Capital is a unique way to invest in renewables. The company has structured itself as a real estate investment trust (REIT) instead of a traditional corporation. Further, rather than owning and operating assets like a wind farm, it provides capital to companies in the energy efficiency, renewable energy, and sustainable infrastructure markets. These investments, typically debt-like financing, generate predictable cash flow that it uses to pay its 3.9%-yielding dividend.
The company believes it can invest about $1 billion per year into a variety of sustainable initiatives. For example, it partnered with solar panel maker SunPower (NASDAQ:SPWR) to help finance its solar lease program. SunPower also formed a joint venture with Hannon Armstrong to acquire and deploy solar panels ahead of a decline in the federal tax credit for solar.
The REIT believes its investments in the sector will grow its earnings by 2% to 6% per year. That should give it the power to steadily grow its dividend.
Intriguing opportunities in the renewables space
The renewable energy sector is still in the early innings of its growth, so dividend-seekers could potentially collect income streams that expand for decades. Atlantica Yield, Clearway Energy, and Hannon Armstrong are among the companies that look like they could deliver years of steady dividend growth, which is why income-focused investors should consider adding them to their watchlist.