Energy stocks have long been known as solid dividend stocks, but the last decade has thrown the market into more turmoil than we've seen in a century. Coal, oil, and natural gas have come under pressure from renewable energy sources, and even formerly rock-solid investment performers like big oil stocks have plunged.
Investors looking to get income from energy dividends today would be wise to look for payouts from companies that have these long-term trends at their back and still have growth opportunities ahead. I think Brookfield Renewable Partners (BEP 1.19%) is the best-positioned energy dividend stock for decades to come.
Follow energy's long-term trends
The macro trends in energy are where investors should start their search for great stocks. Over the last decade, it's become clear that fossil fuels are losing market share to renewable energy in electricity generation markets. The chart below shows how much renewable energy production growth is outperforming fossil fuels.
Transportation markets have been slower to change, but with electric vehicles gaining market share each year it would be surprising if fossil fuel consumption in transportation doesn't lose share to EVs and ultimately renewable-powered EVs long-term.
If renewable energy is growing, that's where I want to put my investment dollars. Within renewable energy stocks, there aren't a lot of dividend-paying companies, but most that are own energy-producing assets, like Brookfield Renewable Partners. And there's a good reason this company stands above other asset owners in renewable energy.
Built to last
Brookfield Renewable Partners owns 19,400 megawatts (MW) of power-generating assets around the world. 64% of those assets are currently hydroelectric power, but the company is increasingly investing in wind, solar, and energy storage. What makes renewable energy assets great is that they usually come with agreements to sell energy to a utility that last 20 years or more. So, the cash flow is predictable and consistent.
What makes Brookfield Renewable Partners unique as an asset owner is that its business is built to both grow organically and has a track record of making value-adding acquisitions. In normal course, management reinvests a portion of cash flow from projects each year in new renewable energy assets in order to grow distributions 5% to 9% annually organically. The goal is to generate a total return of 12% to 15% when the distribution growth is combined with the price appreciation of the stock. When opportunities arise, management will make a big merger by using stock, but it's not reliant on share issuances the way some other renewable energy operators have been in the past.
The fact that Brookfield Renewable Partners aims to grow organically is important and unique among renewable energy stocks. Most companies use their own stock to acquire assets, hoping to buy assets that generate a higher return than the implied cost of selling stock. But that strategy has a checkered history with failures like TerraForm Power and 8point3 Energy Partners. Growing organically means Brookfield Renewable Partners doesn't have to worry about its stock price short-term, and with a dividend yield of 3.3% that could grow for decades, this is a great dividend stock.
Consistency, growth, and cash flow
Brookfield Renewable Partners has all of the qualities energy dividend investors should like. Its cash flows are consistent and contracted for decades to come, it's in a growing industry, and it's generating excess cash to payout as a dividend. And with a business built to grow organically, I think this is the best dividend stock in energy today.