The energy industry is in the midst of an enormous transition. The global economy is slowly weaning off fossil fuels and switching to cleaner alternative energy sources to prevent the worst effects of climate change. The transition could affect the ability of fossil fuel-focused energy companies to maintain and grow their dividends.
However, the decarbonization trend represents a massive opportunity for companies focused on that pursuit. Few companies are in a better position to capitalize on this megatrend than Brookfield Renewable (BEPC 0.81%) (BEP 0.92%). It operates a globally diversified portfolio of renewable energy and transition assets that generate steady cash flow backed by long-term contracts. That gives it the funds to pay an attractive dividend while expanding its operations at a healthy pace. Those features make it stand out as one of the best options in the energy sector for those seeking a sustainable passive income stream.
Built on a solid foundation
Brookfield Renewable has an excellent dividend growth track record. The renewable energy company delivered its 11th consecutive annual dividend increase of at least 5% earlier this year.
The current payout, which yields 3.3%, is in excellent shape. Brookfield generates very stable cash flow backed by fixed-rate power purchase agreements for the bulk of the electricity it produces. Meanwhile, it has a reasonable dividend payout ratio of 76% of its funds from operations (FFO) during the first half of this year. That's close to its 70% long-term target. This approach gives it some cushion and allows the company to retain earnings to help finance its expansion.
Meanwhile, Brookfield has an excellent balance sheet. It has an investment-grade credit rating backed by solid leverage metrics and a well-laddered debt profile with no material near-term maturities. It also has lots of financial flexibility. Brookfield had $4 billion of liquidity (cash and borrowing capacity) and access to $15 billion in capital via a recently closed Global Transition Fund it manages.
Brookfield also has an active capital recycling program. It routinely sells mature assets and redeploys the proceeds into higher-returning opportunities. These factors help put its dividend on a very firm foundation.
The power to continue growing
Brookfield's financial strength gives it the flexibility to continue expanding its operations. The company currently has an enormous backlog of decarbonization investments. It's working to execute a 17-gigawatt (GW) pipeline of under-construction and advanced-stage renewable energy projects. That's part of a massive pipeline of 75 GW of power projects and 8 million metric tons per year of carbon capture and storage capacity it's working to develop. This development pipeline supports the company's aim to double its renewable energy production capacity by 2030. Brookfield believes these projects will help grow its funds from operations by 3% to 5% per share through at least 2026.
The company has two other organic growth drivers: Inflation-driven rate escalations and margin enhancement. It sees inflation adding 1% to 2% to its bottom line each year. Meanwhile, its growing scale and ability to secure higher power prices as existing contracts expire should boost its FFO per share by another 2% to 4% per year. Add it up, and the company can organically grow its FFO by 6% to 11% per share each year. That's enough to support its plans to increase the dividend at a 5% to 9% annual rate.
Brookfield could grow even faster by continuing to make acquisitions. It sees mergers and acquisitions (M&A) adding up to 9% to its bottom line each year, potentially boosting its growth rate to as much as 20% annually. The company's Global Energy Transition Fund is a potentially big M&A driver. It's using that fund to make investments in companies to help accelerate their transition to lower-carbon energy.
It has already secured $1 billion of net investments across a wide range of technologies, including battery storage, carbon capture, distributed generation (such as rooftop solar), and utility-scale solar and wind energy. These investments have it on track to grow FFO much faster than the dividend. That would lower its payout ratio and put the payment on an even more sustainable long-term foundation.
Plugged into a powerful trend
Brookfield Renewable is capitalizing on the enormous opportunity to build and operate renewable energy assets worldwide. The company has a massive pipeline of development projects that should power growth for years. Add in its other growth drivers, and Brookfield should be able to steadily grow its attractive dividend while putting it on an even more sustainable foundation. Those factors make it stand out as one of the best energy stocks for producing passive income over the next decade.
