Renewable energy stocks have become great places to find dividends because the industry relies on large capital deployments that pay off over years or decades. That's the perfect kind of investment for a financing company that uses regular cash flows to pay shareholders.
There are many kinds of renewable energy dividend stocks on the market with different underlying assets. Three of the companies our Motley Fool renewable energy contributors like are Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI), NextEra Energy Partners (NYSE:NEP), and Brookfield Renewable Partners (NYSE:BEP), and here's why they're built to be great dividends for decades.
A little bit of everything
Travis Hoium (Hannon Armstrong Sustainable Infrastructure Capital): Most companies that finance renewable energy projects are focused on one or two areas. Wind or solar energy might be a focus, or even a segment of the solar market like small solar installations. Hannon Armstrong has two outstanding advantages: It's willing to invest nearly anywhere in renewable energy, and it gets more creative than most companies in its financing.
For example, 16% of Hannon Armstrong's portfolio is simply the land under solar projects, which developers rent for their power plants. Another example is the company financing efficiency upgrades for government buildings, which can generate a strong return with only a few years payback period.
Hannon Armstrong's flexibility has allowed it to allocate money to where the best yields are for the associated risk. The company reported in the first quarter that behind-the-meter projects (in which power flows directly to the customer-demand point without having to pass through an electric meter) generated an 8.4% yield compared to 7.1% for the more competitive grid-connected assets. And that's why behind-the-meter projects are 48% of the company's over $3 billion pipeline of renewable energy.
Hannon Armstrong's 2.7% dividend yield is relatively high for energy stocks today. Given the company's diversification and ability to adjust capital investment to where returns are, it's my top pick of the dividend-paying renewable energy stocks.
High yield, lower risk
Howard Smith (NextEra Energy Partners): It makes sense that investors looking for secure income focus on dividends. But sometimes a high dividend yield can also be a warning sign. The yield may be high because the share price dropped due to problems with the business fundamentals. Also, companies can adopt a more risky strategy to support high dividend payouts through borrowing rather than cash generation.
NextEra Energy Partners doesn't have the highest yield available in the renewable energy sector. But cash flow supports it, and the company has a solid pathway for continued growth. That's due to the overall growth expected in renewable generation capacity, and also its unique position as a sister company to NextEra Energy Resources -- the renewables portion of parent NextEra Energy (NYSE:NEE).
NextEra Energy Partners can continue to grow its portfolio and reduce costs by leveraging Energy Resources' operating platform, as it recently did with a more than $700 million acquisition of wind assets which it expects to close in the third quarter of 2021. The transaction for about 400 megawatts of capacity represents about 7% of the company's total current generation portfolio. That acquisition is expected to bring 13 years of known cash available for distribution (CAFD) through its contracted agreements.
NextEra Energy Partners expects its distributions to shareholders to grow 12% to 15% annually through 2024. That is thanks in part to the overall predicted 15% compound annual growth in just the U.S. for renewables generation capacity through 2030.
Including its current 3.5% dividend yield, that's a significant potential opportunity for owners.
So while there may be higher yields available in the space, owners of NextEra Energy Partners get a respectable and reliable yield, along with prospects for growth thanks to the underlying sector expansion.
A good entry-level renewable dividend stock
The most common sectors to find dividend-paying renewable stocks are utilities, infrastructure, and energy. Here, you'll discover the companies that are financing large-scale renewable projects, coordinating logistics, and selling power to end users. It's a massive supply chain, so it's easy to get confused about where to begin.
A great entry-level company that's fairly easy to understand is Brookfield Renewable, one of the largest U.S.-based, publicly traded renewable power companies. It operates just shy of 19 gigawatts (GW) of renewable capacity and has an annualized long-term average generation of over 56,300 GW hours (GWh) -- which is enough energy to power around 5.3 million American homes for a whole year!
In its most recent quarter, Brookfield Renewable generated about 70% of its power from hydroelectric assets in North America, Brazil, and Colombia. Despite the focus on hydroelectric, over a third of its installed capacity is geared toward wind and solar. The company also operates a sizable energy-storage portfolio. In addition to its existing assets, it has about 6 GW of capacity in its development pipeline.
Brookfield Renewable's projects may vary in size and complexity. But as a business, its goals are simple. The company plans to use about 30% of its funds from operations on its business and distribute the other 70% to shareholders through dividends. Under this model, it expects to be able to grow the dividend by between 5% and 9% annually. The dividend is supported by predictable free cash flow (FCF) tied to long-term, fixed-price power-purchase agreements (PPAs). Its average PPA has a remaining life of 14 years, and around 84% of 2021 output is tied to long-term contracts. Put another way, Brookfield's income streams are predictable, which helps it better forecast the needs of its business and the feasibility of dividend raises.
Shares of Brookfield Renewable are down 30% year to date compared to a healthy 12% gain for the S&P 500. The stock looks like a good buy now given the discount, its 2.9% dividend yield, and the bright future of the renewable industry.
Owning the renewable future
The thread these companies have in common is that they own assets that generate steady returns, sometimes for decades. And that stability is what makes renewable energy dividends so valuable, and these three are our favorites.