One of the biggest obstacles hindering the global economy's transition to renewable energy is inadequate electric transmission capacity. Not only is the current electrical grid aging and in need of an upgrade, but the electric utility industry needs to build new infrastructure to connect renewables to the existing system. According to an estimate by WIRES, a transmission trade group, the industry needs to invest $90 billion over the next decade to meet the projected growth in renewable energy alone.
Three top infrastructure stocks focused on this opportunity are Atlantica Sustainable Infrastructure (AY 0.15%), Brookfield Infrastructure (BIP 3.73%) (BIPC 1.62%), and NextEra Energy (NEE 0.55%). That's only part of their story, which makes that great infrastructure stocks to buy this month.
A well-powered dividend
Atlantica Sustainable Infrastructure currently operates 1,166 miles of electricity transmission lines in Peru and Chile. While this business is a relatively small contributor at 15% of its earnings compared to 69% from its renewable energy segment, it produces stable cash flow backed by long-term contracts. That helps support Atlantica's 5.9%-yielding dividend.
The company has been steadily expanding its transmission business. For example, last year it spent $20 million to acquire ATN Expansion 2, which included two operating transmission lines in Peru. The company has already identified several additional transmission opportunities. Add this to its other infrastructure growth options in renewables, natural gas power, and water, and Atlantica should be able to continue growing its high-yielding dividend and generating attractive total returns for its investors.
Cashing in on transmission
Brookfield Infrastructure currently owns about 1,250 miles of transmission lines. Like Atlantica, this business is a relatively minor contributor at 13% of its overall earnings. However, because these assets produce a stable income stream, they help support Brookfield's 4%-yielding dividend.
Brookfield's transmission strategy focuses on high-return development opportunities that it eventually cashes in via a sale. That was the case with is North American transmission assets this year as it was able to sell them at an attractive 21% internal rate of return. Meanwhile, the company's most recent development activities have been in Brazil. It took advantage of that country's recession in 2016 to buy up concessions to build new lines, which will enable it to benefit from high cash yields while it owns them and eventually earn an attractive return when it sells. This strategy has paid dividends over the years and will likely continue, given the transmission sector's investment opportunity. When combined with Brookfield's other infrastructure investments in energy, utilities, transportation, and data, its transmission strategy will help it deliver on its plan to grow its dividend by 5% to 9% per year.
High powered earnings and dividend growth ahead
NextEra operates the leading competitive transmission company in North America. It currently has 8,700 miles of assets in California, New Hampshire, and Texas and several other development projects in the U.S. and Canada, with it investing $3 billion in nine regional utilities.
Meanwhile, the company is enhancing its transmission business by recently agreeing to acquire GridLiance. It's paying $660 million for the company, which operates 770 miles of transmission lines and related equipment via three regional transmission organizations across six states. One of the drivers of the deal is that it should benefit from the substantial growth in renewable energy in the future by connecting projects to the grid.
Those transmission investments are helping power NextEra's growth outlook, which will also benefit from its leading renewable energy development program. It recently boosted and extended that forecast, which increases the probability it will deliver on its plan to grow its 2%-yielding dividend by around 10% per year through at least 2022.
Transmission is just part of the infrastructure story
The electric industry needs to invest billions of dollars to build new transmission infrastructure over the next decade to support renewable energy growth. That should provide plenty of investment opportunities for infrastructure companies like Atlantica, Brookfield, and NextEra. Add that upside to their other infrastructure growth opportunities, and these infrastructure stocks look like compelling buys this October.