Renewable energy stocks might not be the first place you look for dividends, but maybe they should be. Leading owners of renewable energy assets have long histories of paying growing dividends and own assets that have contracted energy payments for decades.
Given low yields in bond markets and high valuations for growth stocks, dividend stocks like Brookfield Renewable Partners (BEP -1.95%), Hannon Armstrong Sustainable Infrastructure Capital (HASI -1.25%), and NextEra Energy Partners (NEP 0.37%) may be some of the best buys on the market today.
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The renewable energy leader
Brookfield Renewable Partners is one of the savviest and most consistent renewable energy companies in the world. It owns and operates 6,000 power generating facilities around the world with about 21 gigawatts of capacity. The company aims to deliver 12% to 15% annualized total returns through its current payout, 5% to 9% annual dividend increases, and the rest through stock appreciation.
While Brookfield Renewable Partners has made acquisitions in the past, the company has also grown organically, which is crucial in renewable energy. If a company can grow through investing its own excess cash flow, it doesn't need to rely on stock sales or increasing debt, which drove the industry's growth only a few years ago.
This yieldco isn't as high as it was a year ago, but the stock still yields 3.1%, and with the organic growth, management expects this is a stock that could offer a much higher payout only a few years from now.
BEP dividend yield data by YCharts.
To top it off, the weighted-average remaining contract to sell electricity for the company's portfolio is 14 years, nearly guaranteeing cash flows for over a decade. That's the kind of dividend stock I want to be invested in.
Investing where the opportunities are
Hannon Armstrong is one of the most diverse renewable energy companies in the world, investing anywhere there's an opportunity. The company will invest in energy-efficiency projects, rooftop solar, the land under wind farms, and anything in between. And you can see the company's cash flow and funds from operations have grown steadily over the last decade.
HASI revenue (TTM) data by YCharts. TTM = trailing 12 months.
Few companies are investing in new asset classes that Hannon Armstrong is in. The company has started investing in energy storage and even "green real estate," which consists of housing loans that incentivize energy- and water-efficiency investments.
There are a few advantages to Hannon Armstrong's diverse and pioneering strategy. One is that early movers can often generate higher yields than in established markets. For example, the target return on solar and wind energy projects was as high as 20%, according to the OECD, as recently as 2016. Now, a mid-single digits returns are expected. So, getting in early can be important.
Another important advantage is Hannon Armstrong being able to follow the best yields available for the risk being taken. Management has said behind-the-meter assets, or assets at a home or business that are between the utility meter and the demand source, are yielding 8.4% right now, higher than the 7.1% for grid-connected assets and 7.3% in sustainable infrastructure. And based on the portfolio's yield rising 10 basis points to 7.7% over the last quarter, it appears the company is adding behind-the-meter assets at a rapid clip. Few companies can follow the yield as well, which is great for dividend investors.
The renewables giant
Through various subsidiaries, NextEra Energy (NEE -1.74%) is the world's biggest owner of renewable energy assets. And one of its jewels is NextEra Energy Partners. The company owns 5,830 megawatts of renewable energy assets, most of which from wind projects in the U.S. And the assets have a weighted contract life remaining of 13 years.
Unlike the companies above, NextEra Energy Partners is able to use NextEra Energy Resources (another NextEra Energy subsidiary) as a project developer. NextEra Energy Resources finds and builds wind or solar projects, eventually dropping them down to NextEra Energy Partners, which is the long-term operator of the asset. NextEra Energy Resources' development pipeline currently stands at 31 GW to 45 GW between now and the end of 2024. So there are plenty of growth acquisitions already in the pipeline.
Management expects the 2021 dividend to be between $2.76 and $2.83 per share, which is a 4.1% implied yield at today's stock price. But what should excite investors is a projected 12% to 15% average annual dividend growth through at least 2024.
NextEra Energy operates like most other yieldcos, generating money from projects over time that's returned to shareholders as a dividend, but it has the benefit of being backed by one of the country's largest utilities. And with a strong yield that's growing, this is a dividend stock to hold long term.
Dividend stocks to bet on
Renewable energy is one of the fastest-growing asset classes in energy, and stocks like these come with compelling dividends long term. With a growing asset base and years of contracted life remaining, these are great dividend stocks to own for years and ride the renewable energy wave as an investor.
