Clearway Energy's (CWEN 1.12%) (CWEN.A 1.50%) dividend has been growing at a brisk pace this year. The renewable energy producer increased its payout by 5% in February and then provided investors with a monster 49% raise in August. As a result, it now yields an attractive 4.8%.
The company has plenty of power to continue pushing its payout higher. That was one of the key takeaways from its second-quarter conference call. Here's why Clearway sees a bright future ahead for its dividend.
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High-end growth in 2021
Clearway Energy supercharged its dividend this year because one of its largest customers, California utility Pacific Gas & Electric (PCG 0.61%), reemerged from bankruptcy without altering the power purchase agreements supporting some of Clearway's assets. Because of that, Clearway now has unrestricted access to the cash it receives from PG&E, giving it the freedom to pay a bigger dividend. With its latest boost, it pays out about 81% of its cash flow, which is at the low end of its 80% to 85% target range.
The company expects to provide its investors with another sizable increase next year. CEO Chris Sotos stated on the second-quarter call that his company "anticipates being able to increase the dividend at the upper end of our 5% to 8% long-term growth rate for 2021." Several factors support that view. First, the company is acquiring three wind projects that should combine with other growth initiatives to boost its cash flow per share by 10.4% from this year's expected rate. Because of that, even with an 8% dividend increase, its dividend payout ratio will be right at the low end of its target range.
Plenty of power to keep growing
Sotos also made it clear that the company expects to continue growing its dividend in the future, stating that "we are still targeting a 5% to 8% long-term dividend growth rate." He then outlined several catalysts that should power dividend growth over the longer term.
First, he noted that "with the constraints from PG&E now behind us, during the quarter, we were also able to advance new growth." The headliner was an agreement to acquire an interest in the Mesquite Star wind project, which it initially had to forgo because of the PG&E bankruptcy. It will invest about $79 million for a stake in an asset that will generate about $8.3 million in average annual cash flow over the next five years. The company also won approval for a small $19 million project in San Francisco to supply emergency power to the grid. It should generate $5 million in annual cash flow when it starts up later next year. These projects will help power dividend growth post-2021.
In addition to those secured additions, Clearway also made progress on other investment opportunities. Sotos stated that "we are acutely focused on driving growth for 2021 and beyond, especially in partnership with Clearway Group." He pointed out that it recently "received a drop-down offer from Clearway Group for 100% of the ownership interest in Langford following its repowering, and the remaining interest in Hawaii Solar Phase I." If they can agree on terms, those assets would provide another boost to its cash flow in the coming year. Sotos also said that:
We are engaged in structuring a co-investment in a 1.2-gigawatt portfolio of renewable assets under development by Clearway Group, with expected commercial operation dates from 2021 to 2022. While we are in the early stages of this process, the sizable portfolio will provide additional growth on a longer-term basis with an estimated 15-year weighted average life for Clearway Energy Inc.'s CAFD (cash available for distribution) per share, which will support sustained dividend growth in the future.
As Sotos points out, Clearway is working to leverage its relationship with its parent to ensure it has plenty of power to continue growing its dividend over the next few years. With several acquisitions lined up and many more in the works, the company's growth is getting much more visible, which bodes well for its ability to deliver on its long-term dividend growth plan.
A bright future for this dividend stock
Clearway Energy was able to supercharge its dividend this year after one of its key customers finally emerged from bankruptcy. More growth appears to be ahead, powered by a steady string of acquisition and investment opportunities. Because of that, Clearway looks like it could be a great option for dividend investors who want an income stream powered by renewable energy.
