One of my investing goals this year has been to build out a basket of renewable energy stocks to benefit from the growth I see ahead in the sector. Among the most recent entrants to that mini-portfolio was renewable energy yieldco Clearway Energy (CWEN -0.50%) (CWEN.A -0.44%). I purchased 15 shares in late February, spending about $330.
Given all the volatility in the stock market, that initial position has lost value. However, instead of lamenting the loss, I'm planning to take advantage of the decline by pouring another $250 into that position this April. Here's why I'm adding so soon after my initial purchase.
A cheaper valuation and higher yield
Shares of Clearway Energy have fallen about 15% over the past month, due entirely to volatility driven by COVID-19 outbreak. That sell-off has pushed the company's dividend yield up to 4.7%, which is higher than the 3.8% payout I locked in toward the end of February.
That dividend should be on solid ground, assuming the U.S. economy doesn't go into a prolonged slump as a result of the COVID-19 outbreak. That's because Clearway is well-protected from a short-term downturn due to the structure of its power purchase agreements, which guarantees it a fixed rate for the power it produces. In the company's view, those contracts should supply it with $310 million of cash available for distribution this year, which is money it could pay out in dividends. That's 22% above last year's level thanks to recent acquisitions and debt refinancing. This forecast implies a 50% dividend payout ratio at last year's rate, which gave the company the confidence to increase its dividend by 5% this year.
Lots of upside catalysts
While the COVID-19 outbreak will probably affect power demand over the coming months, that shouldn't affect Clearway Energy since utilities would probably reduce the production of higher cost electricity generated by fossil fuels. Clearway appears as if it has lots of upside due to the clear catalysts it has on the horizon.
For starters, the company is a major power supplier to bankrupt California utility PG&E (PCG 1.45%). That relationship has impacted Clearway in the past year because of lender restrictions on the cash generated from its power purchase agreements by assets tied to PG&E. However, that company has recently reached a deal with the state of California to emerge from bankruptcy. This agreement won't alter its power purchase agreements with third-party electricity suppliers like Clearway. The company will not only continue collecting the same rate on those contracts but will also be free to use the money it earned while PG&E was in bankruptcy. That could enable it to boost its dividend even further this year.
Clearway also has several other potential growth catalysts lined up that could bolster its cash flow this year. Its parent, Clearway Energy Group, recently offered it the opportunity to acquire and invest in a portfolio of projects. These options include buying the Rattlesnake Wind Project, the rest of its parent's interests in Repowering 1.0, and a new partnership to repower the Pinnacle Wind Project. If it moves forward with these investments, they could help power faster growth this year while setting it up to keep expanding its cash flow in 2021.
Clearway has lots of growth potential beyond those near-term opportunities. That's due to its focus on clean energy and relationship with both Clearway Energy Group, which develops renewable energy projects, and Global Infrastructure Partners, which is a leading infrastructure fund manager. Those relationships have already provided Clearway with several investment opportunities and should continue presenting it with a steady pipeline of growth options in the years to come.
It's time to add
Thanks to $0 stock trading commissions these days, investors like me can start with a small investment in an intriguing company and slowly add to it over time. That's what I'm doing with Clearway Energy this year as I'm taking advantage of March's sell-off to boost my initial position and lock in an even higher yield. It likely won't be my last purchase since Clearway appears to have lots of upside ahead as it keeps building out a portfolio of cash-generating clean energy assets so that it can grow its dividend.