High-yield dividends and energy stocks have gotten renewed focus from investors as interest rates have risen and investors have sought out "safe" stocks. But not all stocks are created equal, because even in energy, they may have different exposures to commodities or other risks.
One company that I think has a great combination of stability and long-term growth opportunities is NextEra Energy Partners (NEP +1.21%), the renewable energy investment arm of NextEra Energy (NEE 1.01%). The stock pays a 4% dividend yield and has decades of visibility to its revenue streams, which most companies can't say today.
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Building a renewable energy giant
As of the end of the second quarter of 2022, NextEra Energy Partners owned 6,640 megawatts (MW) of wind assets, 1,530 MW of solar, 90 MW of storage assets, and some remaining natural gas pipelines.
This is a big base of assets, but they're also extremely stable, serving 87 customers with an average remaining contract life of 14 years. This gives management the ability to plan the business. Right now they expect the annualized distribution to investors to grow 12% to 15% per year through at least 2025, to $4.45 to $4.95 per share. At the midpoint, the stock trades at a 6.2% dividend yield in 2025.
NYSE: NEP
Key Data Points
Headwinds and opportunities
There's no question that NextEra Energy Partners will face headwinds when refinancing the $5.3 billion in debt that's on the balance sheet. Both project and corporate debt will mature periodically starting in 2023. But most of its debt doesn't start maturing until 2024, when $1.3 billion matures.
For existing projects, higher interest rates will likely mean lower margins unless there are inflation escalators in contracts with electricity off-takers. But for newer projects, the company can demand a higher rate of return to adjust to higher rates.
On the opportunity side, there are new subsidies that will help NextEra Energy Partners finance projects over the next decade. Wind, solar, energy storage, and even hydrogen got new or extended subsidies as part of the Inflation Reduction Act, which will make more projects economical. That could expand the market opportunity for NextEra Energy Partners, especially since it is one of a small number of companies financing projects at a large scale.
Setting expectations
As much as I think NextEra Energy Partners is a "no-brainer," it's worth setting expectations for the stock. The company, and the renewable energy industry broadly, benefited from low interest rates over the last decade. If rates continue to rise, there could be significant pressure on both the rate of return projects can generate and the stock as investors demand a higher yield.
With that in mind, I think if investors think of this as a buy-and-hold stock that will generate a steady dividend that grows slowly over time, this is a great investment. NextEra Energy Partners won't make a lot of headlines, but it'll help power your portfolio's gains over a long period of time.
