This Big-Time Passive-Income Producer Has the Wind at Its Back

Clearway Energy (CWEN -0.97%) (CWEN.A -1.05%) is becoming an excellent stock for those seeking to generate some passive income. The company owns a growing portfolio of clean power generating assets secured by long-term contracts. Those agreements provide it with a sustainable income stream to support its lucrative dividend, which currently yields around 4%.

Clearway Energy believes it can grow that big-time payout toward the upper end of its 5% to 8% annual target range through 2026. It recently secured more power to increase its dividend payment, making that high-end growth rate even more achievable. 

A powerful addition

Clearway Energy has agreed to buy a portfolio of operating wind energy projects from Capistrano Wind Partners. The company is paying $255 million in cash for the portfolio, plus the assumption of $160 million in debt. The portfolio comprises five utility-scale wind farms in Texas, Nebraska, and Wyoming with 413 megawatts of generating capacity. They began operations between 2008 and 2012 and sell power under long-term power purchase agreements with a weighted average remaining contract term of about 10 years. They should supply the company with relatively steady cash flow for the next decade. 

This portfolio also comes with embedded upside potential. Clearway Energy sees the prospect of repowering these wind farms by replacing their aging turbines with larger ones that can produce more power. The company's sponsor, renewable energy project developer Clearway Energy Group (CEG), has agreed to pay Clearway $10 million for the rights to develop the potential repowering projects. CEG currently manages the assets for Capistrano Wind Partners, making it very familiar with these wind farms and their repowering potential. Clearway Energy can invest in these future repowering projects alongside its sponsor, providing it with another potential long-term growth driver.

After factoring in that rights fee and the new debt Clearway expects to layer onto the portfolio, it sees the total capital outlay between $110 million and $130 million. The company expects that investment to generate an average of $12 million to $14 million of annual cash available for distribution over the next five years. That will give it some incremental cash flow to support its forecast of achieving dividend growth in the upper end of its 5% to 8% annual range through 2026.

More power to keep growing

This acquisition puts Clearway another step closer to allocating the cash it received from selling its thermal assets to KKR for $1.35 billion in net proceeds earlier this year. The company already had $600 million of deals lined up before closing the sale, leaving it with $750 million left to allocate. It has since identified at least $300 million of assets that CEG is developing that its sponsor will drop down in the future. With this latest transaction, the company has now lined up deals for up to 55% of those excess proceeds.

That still leaves the company with a lot of capital to put to work. It also has many options and plenty of time since its current pipeline of deals will help power growth for the next few years.

The biggest opportunity continues to be its relationship with CEG. That company has 6.7 gigawatts of late-stage renewable energy projects it expects to complete by 2026. Clearway Energy has secured the right to acquire a portion of the projects CEG anticipates finishing in 2022 and 2023. That leaves ample opportunity to purchase additional assets from its sponsor in the future.

Meanwhile, global energy giant TotalEnergies (TTE -0.32%) recently agreed to invest in CEG. One aspect of that strategic partnership is that it gave Clearway the right of first offer to buy U.S. onshore renewable assets developed by TotalEnergies and its affiliates. That company controls a vast portfolio of operating renewable energy projects and late-stage developments, so Clearway should have lots of opportunities to acquire assets from TotalEnergies in the coming years. 

Finally, the company should be able to continue acquiring assets from third-party owners like Capistrano Wind Partners. Clearway Energy has a long history of buying assets from third parties to supplement the deals it completes with its sponsor.  

Powerful dividend growth ahead

Clearway Energy already produces an attractive passive income stream given its 4%-yielding dividend. However, the company expects to grow that payout by about 8% annually through 2026. It seems increasingly likely to achieve that bold goal as it lines up more deals to redeploy the cash windfall it received by selling its thermal assets. That makes Clearway a great stock for those seeking a sustainable passive income stream.