Clearway Energy (NYSE:CWEN)(NYSE:CWEN.A) is one of the largest renewable energy producers in the U.S. Those assets generate lots of clean energy for the power grid and cash flow for Clearway's investors. The company currently pays out the bulk of that money via its dividend, which yields 3.6%. That's more than double the S&P 500's yield of 1.25%.  

What makes that dividend even more attractive is its growth potential. The company recently set its sights higher, which could power big-time total returns for investors in the coming years.

Two people in hard hats and a laptop looking at a row of wind turbines.

Image source: Getty Images.

Delivering despite a major headwind

Clearway Energy restarted its dividend growth engine last year. The company has increased its payout each quarter since last June, growing it by nearly 7% over the past year, including 1.6% in the most recent quarter. That achieved its goal of delivering dividend growth at the upper end of its 5% to 8% long-term target range.  

The company delivered that higher-end growth despite a major headwind to start the year. The winter storms across Texas in February impacted its cash flow by about $30 million. However, the company offset that issue, thanks partly to closing on the acquisition of another 35% interest in the Agua Caliente solar farm in the first quarter. That deal boosted its stake to 51% and allowed it to remain on track with its full-year guidance for cash available for distribution of $325 million. 

Meanwhile, the company also made lots of progress on its strategic growth plan. It signed new contracts for two of its natural gas power plants, selling 80% and 100% of their capacity, respectively, through 2026. It also agreed to acquire a 50% interest in a portfolio of solar energy projects in Utah and decided to sell its thermal business to a private equity fund. These deals set it up for continued growth in the coming years. 

Setting its sights higher

Clearway Energy's strategic successes in 2021 have bolstered its confidence in its ability to grow the dividend in the future. It's now targeting dividend growth at the upper end of its 5% to 8% range through 2026. That higher target sets the company up to potentially deliver higher total returns in the coming years.

Several factors are driving the company to sight its sights higher. One major catalyst is the sale of its thermal assets for $1.9 billion, or $1.3 billion in net cash after repaying the associated debt. The company plans to use about $620 million of those funds to close its Utah solar acquisition and its committed drop-down investments from its parent, Clearway Energy Group (CEG). That will leave it with about $680 million of capital to deploy on future opportunities. 

It has already identified several potential investment opportunities thanks to its relationship with CEG. Its parent currently has over 1.9 gigawatts (GW) of late-stage development projects that Clearway could fund through 2024. Meanwhile, CEG has a larger long-term development pipeline of more than 17 GW of projects.

In addition to its relationship with CEG, Clearway can continue to pursue third-party acquisitions. The company has made several such deals, including buying the Mt. Storm wind farm in West Virginia from Castleton Commodities International in April and another 35% interest in the Agua Caliente from NRG Energy (NYSE:NRG). With renewable energy project developers and utilities needing capital to fund new investments, Clearway should have plenty of opportunities to acquire renewable energy assets from third-party owners.  

A powerful dividend growth stock

Clearway Energy delivered high-end dividend growth this year despite some headwinds thanks to the success of its strategic expansion plan. It now believes it can continue growing its dividend toward the upper end of its long-term target range through 2026. That sets investors up to capture a growing stream of renewable-powered income over the next several years, making Clearway stand out as an excellent buy for dividend seekers.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.