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Better Buy: NextEra Energy Partners vs. TC Energy

By Matthew DiLallo – May 27, 2020 at 9:19AM

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These two high-yielding energy giants go head-to-head.

NextEra Energy Partners and TC Energy offer dividend investors attractive yields. NextEra's payout is currently around 4.5%, while TC Energy's is about 5.5%.

That bigger payout might cause some yield-focused investors to immediately tab TC Energy as the better dividend stock to buy. However, making a decision based on yield alone could prove disastrous, since there is always more to a stock's story than its payout.

With that in mind, here's a closer look at these two high-yielding energy stocks.

Digging into the numbers

One of the most important things an income investor must do when trying to decide between two options is to take a closer look at their financial profiles. Here's how these two energy companies compare.


Credit Rating

% of Cash Flow Fee-Based or Regulated

Dividend Payout Ratio

NextEra Energy Partners (NEP -2.40%)


About 100%


TC Energy (TRP -2.21%)




Data source: TC Energy and NextEra Energy Partners.

As that table shows, the two companies have quite different financial profiles. TC Energy has A-rated credit -- one of the highest ratings in the pipeline sector -- and one of the lowest dividend payout ratios. NextEra Energy Partners, on the other hand, has junk-rated credit and a much higher dividend payout ratio. That weaker credit rating is worth noting since it's usually easier and less expensive for investment-grade rated companies to borrow money. That gives TC Energy a distinct competitive advantage in financing expansion-related initiatives.

Oil pumps, a natural gas well, and solar panels with the sun setting in the background.

Image source: Getty Images.

A look at growth forecasts

TC Energy is already one of the largest energy infrastructure companies in North America. However, it has no shortage of expansion opportunities. The Canadian pipeline giant currently has 43 billion Canadian dollars ($30.7 billion) of growth projects under way. It expects to build several natural gas pipelines across North America, more oil pipelines -- including the Keystone XL pipeline -- and extend the life of its clean-energy producing nuclear power plant. In TC Energy's view, these projects should provide it with enough fuel to grow its dividend by 8% to 10% next year and at a 5% to 7% annual pace in future years. Meanwhile, with a low dividend payout ratio and top-tier balance sheet, TC Energy has the financial flexibility to fund this expansion without stressing its balance sheet. 

NextEra Energy Partners has a more ambitious dividend growth outlook. The company, which operates renewable energy assets and gas pipelines, expects to grow its dividend by 12% to 15% per year through at least 2024. It currently believes it has enough power to support that plan through next year without needing to make any more acquisitions. However, it will need to complete additional transactions to power dividend growth in 2022.  

The main source of its growth will likely come from drop-down transactions with its parent NextEra Energy (NEE -1.27%). The electric utility has an extensive portfolio of fully contracted wind and solar assets in operation that it can sell to its affiliate as well as a massive backlog of projects under development. Thus, NextEra Energy Partners has no shortage of acquisition opportunities. The question is whether it will be able to secure financing at an attractive cost. While it hasn't had any trouble getting funding from creative sources like private equity, if those options dry up in the future due to financial stress in the market, then NextEra Energy Partners might fall short of its dividend growth goals.

Verdict: TC Energy is the lower-risk buy

NextEra Energy Partners offers investors an enticing yield along with an ambitious dividend growth plan. While I think its strategy could pay off, it's a higher-risk opportunity than TC Energy. Because of that, I think the Canadian energy infrastructure giant is the better option for yield-seeking investors right now.

Matthew DiLallo owns shares of NextEra Energy and NextEra Energy Partners. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.

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Stocks Mentioned

TC Energy Stock Quote
TC Energy
$42.49 (-2.21%) $0.96
NextEra Energy Partners Stock Quote
NextEra Energy Partners
$75.75 (-2.40%) $-1.86
NextEra Energy Stock Quote
NextEra Energy
$81.77 (-1.27%) $-1.05

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