Shares of Clearway Energy (CWEN -0.32%) (CWEN.A 0.64%) have cooled off considerably in 2021. After a scorching-hot run in 2020, the renewable energy stock is now nearly 30% off its recent high. That sell-off has pushed its dividend yield to an enticing level of around 5%. Add that to its long-term growth prospects, and I couldn't resist the opportunity to add to my position.
An attractive yield in the current environment
Clearway Energy has significantly enhanced its dividend over the past year. The company had to reduce the payout by 35.7% in early 2019 when one of its largest customers, California-based utility Pacific Gas & Electric (PCG 1.38%), filed for bankruptcy. However, the bankruptcy process didn't alter Clearway's power purchase agreements (PPAs) with the utility. As a result, it was able to reset its payout level last year when PG&E re-emerged. In addition to a massive one-time boost, Clearway has provided its investors several other smaller raises over the past year. Overall, its dividend is now 62% above 2019's level. At the current stock price, that implies a 4.9% yield, which is well above the S&P 500 index's current level of around 1.5%.
That high-yielding dividend is on a solid foundation. Clearway generates very stable cash flow backed by long-term PPAs with an increasingly diversified customer base. The company has focused on acquiring renewable energy assets secured by other customers so that a future bankruptcy won't have as much impact on its results. On top of that, it has a reasonable dividend payout ratio that's currently at the low end of its target range, and lots of financial flexibility.
A well-powered growth plan
Clearway Energy has worked hard to improve its funding capabilities over the past year to continue expanding its portfolio. That has enabled the company to capture several investment opportunities, giving it more power to grow its dividend. Clearway currently believes it can increase its payout at a 5% to 8% rate per year, with high-end growth likely in 2021, thanks to its recent success in securing investment opportunities.
The company has secured nearly $1 billion of new investments over the past year. That includes deals it expects to close in 2021 and other long-term opportunities that should start paying dividends in future years as they come online. Those investments give Clearway a clear line of sight to grow its cash flow per share by 30% from last year's level, once all its projects start generating cash.
Meanwhile, the company has a strategic relationship with renewable energy project developer Clearway Energy Group (CEG). It has the right of first offer to acquire future projects CEG develops. That's a sizable opportunity set, as CEG currently has more than 10 gigawatts of renewable energy projects in its development pipeline. For perspective, Clearway's current operating portfolio consists of 8.2 gigawatts of renewable, conventional, and thermal energy capacity. While it won't acquire all of those assets, as it will likely bring on co-investors to help finance future purchases, it should be able to continue making a steady stream of new investments thanks to this relationship.
On top of future drop-down deals with CEG, Clearway Energy will likely continue making third-party acquisitions. It recently purchased an additional 35% stake in a solar project from NRG Energy and bought a wind farm in West Virginia from another seller. Given the enormous amount of money needed to expand the renewable energy sector in the coming years, Clearway should have plenty of opportunities to purchase operating assets so that developers have the cash to continue building.
A high-powered dividend growth stock on sale
Clearway Energy's recent sell-off pushed its dividend yield up toward 5%. Add that income to its increasingly visible growth prospects, and the renewable energy producer should have the power to produce market-beating total returns in the coming years. That combination of income and growth was too attractive to miss, which is why I recently boosted my position in the company.