The past decade has been rough for U.S. utilities large and small. Consumption growth has slowed to a snail's pace, coal plants are being shut down and disappearing from the grid, and consumers have more choices than ever with rooftop solar now on over 1 million homes nationwide.
However, there are reasons for the energy companies in the electricity business to be bullish on the future. The biggest reason is that Tesla has led an electric vehicle revolution that could begin adding significant electricity demand to the grid. If companies play the business right, they could have decades of growth ahead, reversing the stagnation in energy utilities over the last decade.
Here are four ways to play the growth and get a hefty dividend along the way.
The biggest bets on renewable energy
One of the best ways to get exposure to growing electricity demand and growing demand for renewable energy is through a yieldco stock. Yieldcos own renewable energy assets and sell electricity to utility companies, using the proceeds to pay dividends to their shareholders.
My top two yieldcos today are NextEra Energy Partners (NYSE:NEP) and Brookfield Renewable Partners (NYSE:BEP). They both have dividend yields of 4% and are among the biggest renewable energy owners in the U.S. Brookfield Renewable Partners is also in the process of acquiring its sister yieldco TerraForm Power (NASDAQ:TERP) to transition its primary energy source from hydropower plants to more wind and solar energy. The combination will give the company even more stability and access to Brookfield's immense pipeline of projects.
NextEra Energy Partners is among the best positioned because of its sponsorship by utility NextEra Energy. The yieldco aims to pay out in the mid-70% of its cash available for distribution, and by the end of 2020, it's expected to grow its dividend to $2.40 to $2.46 per share. Dividend growth is expected to be 12% to 15% annually through 2024.
Brookfield Renewable Partners is one of the few yieldcos that aim to grow organically. Management aims to increase the dividend by just 5% to 9% annually, with any excess cash flow going to organic renewable energy project acquisitions.
Renewable energy now accounts for a majority of new electricity generation built in the U.S. each year. That presents a huge opportunity for NextEra Energy Partners and TerraForm Power to grow their businesses and dividends long term.
The direct electricity plays
As electric vehicle use grows, more customers will find rooftop solar energy a valuable addition to their energy mix. More than 2 million homes already have rooftop solar, and at the current pace, another 1 million will be added about every two years.
This presents a huge opportunity for rooftop solar installers like Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR). The two companies offer $0 down solar installations and finance projects through long-term contracts with homeowners, which allows them to turn around and sell tax benefits and future cash flows to financial partners. After financing deals, these installers keep a portion of those installations' expected cash flow, which currently stands at $1.44 billion for Sunrun (in present-day value) and $1.26 billion for Vivint Solar. This value will continue to grow as rooftop solar systems are built.
What's exciting about residential solar companies in the long term is that they could play an increasingly important role in the grid. Between solar installations and energy storage in homes, Sunrun and Vivint Solar can start building "virtual power plants". This would involve selling stored electricity to the grid when electricity prices are high and then saving electricity when electricity prices are low or there's excess power created by a solar system during the day. This could add additional value to homeowners, utilities, and solar installers themselves. As renewable energy and EVs force utilities to have a more dynamic grid, this is a valuable position for the companies.
Preparing for a renewable energy future
The energy industry is changing quickly, and I think the next decade will see an accelerated shift to renewable energy projects large and small. As that happens, NextEra Energy Partners, Brookfield Renewable Partners, Sunrun, and Vivint Solar should all have the opportunity to grow and profit from a renewable future.