Many dividend investors focus on a stock's yield. However, the data points to an even more important factor: A company's ability to increase its payout. Over the last 50 years, dividend growers have vastly outperformed companies with no change in their dividend policy (10.7% annualized total return vs. 7.1%), according to a study by Ned Davis Research and Hartford Funds.
Many companies pay attractive and growing dividends. However, one stands out for its combination of having an above-average dividend yield and superior dividend growth prospects: NextEra Energy Partners (NEP -1.49%). Dividend investors will want to consider adding it to their portfolios.
A compelling value proposition
NextEra Energy Partners stands out among dividend stocks:
Image source: NextEra Energy Partners Investor Relations Presentation.
As that slide shows, it's one of only 186 companies in the S&P 1000 with a market cap above $5 billion. That gives it a decent size. Larger companies can benefit from scale advantages. However, it's typically more challenging for larger companies to grow rapidly.
Of that group, NextEra Energy Partners is one of 54 that offers a dividend yield above 2.25% (which is higher than the average of the broader market as measured by the S&P 500's 1.67% dividend yield). In the company's case, it currently yields 4.14%. Companies with higher dividend yields usually grow more slowly. That's because they typically pay out a larger percentage of their cash flow via the dividend instead of retaining those earnings to finance growth.
That's why only 14 of those higher-yielding stocks have been able to deliver dividend-per-share growth of greater than 50% over the last five years. In NextEra Energy Partners' case, it has nearly doubled its dividend over the last five years, growing it by an eye-popping 94.4%:
NEP Dividend data by YCharts
Meanwhile, only three of the remaining companies expect to deliver more than 12% compound annual dividend per share growth in the 2021 to 2024 timeframe. However, only NextEra Energy Partners expects to achieve greater than 12% dividend growth through 2025 (it's targetting 12% to 15% compound annual dividend growth during that period).
This combination of dividend growth and yield could give NextEra Energy the power to produce 16% to 20% annualized total returns over the next few years. That would continue its market-beating ways. It has delivered a nearly 18% annualized total return over the last five years.
What's powering NextEra Energy Partners' dividend?
NextEra Energy Partners' dividend sits on a solid foundation. The company owns a large-scale portfolio of clean energy infrastructure, including wind farms, solar generating facilities, and natural gas pipelines. These assets produce stable cash flow backed by long-term contracts with utilities and other end users. That supplies the company with predictable and steady cash flow to support its dividend.
The company pays out about 80% of its earnings via dividends. That gives it a nice cushion while allowing it to retain some cash to finance its expansion.
NextEra Energy Partners has several other sources to help fund growth. One notable option it has used several times in recent years is convertible equity portfolio financing. It arranges this financing structure with an institutional investor like a pension or private equity fund. It pays them a low fixed rate on funding backed by a portfolio of income-producing infrastructure. NextEra Energy Partners has the right to buy out this financing at a fixed return with either cash or stock. It enables NextEra Energy Partners to obtain equity funding while limiting the dilution to existing shareholders.
The other big factor driving the company's rapidly rising dividend is its strategic relationship with leading utility NextEra Energy (NEE 0.51%). Its parent routinely drops down cash-flowing infrastructure assets to its affiliate. Those transactions supply the utility with cash to fund new investments while growing its partnership's cash flows to support its dividend growth plan. For example, in November, NextEra dropped down a 49% interest in a 1.5-gigawatt renewable energy portfolio and a 100% interest in a 345-megawatt portfolio of operating wind assets to the partnership. It funded this transaction by securing a 10-year convertible equity portfolio financing arrangement with Ontario Teachers' Pension Plan Board for $805 million backed by those and other assets.
NextEra Energy has a vast portfolio of clean energy infrastructure assets in operations and more under construction, providing lots of visibility into NextEra Energy Partners' growth. In addition, the company can make third-party acquisitions and complete organic expansions to drive dividend growth.
A high-powered dividend stock
NextEra Energy Partners stands out for its combination of yield and dividend growth for a company of its size. It can make a great addition to income-seeking investors' portfolios since it could supply them with a rapidly rising payout backed by high-quality clean energy assets. It could also supercharge their returns, given its potential to produce market-crushing total returns.
