Investing $1,000 Into This 5.9%-Yielding Dividend Stock Would be a Smart Move in July

Dividend stocks can be smart investments. They've historically produced market-beating total returns:

Data source: Ned Davis Research and Hartford Funds. NOTE: Returns from 1973-2022. 

As that table shows, the best returns come from companies that increase their dividends.

Few companies plan to grow their dividends faster than NextEra Energy Partners (NEP -0.89%). The renewable energy producer plans to boost its payout by 12% to 15% annually through at least 2026. That's a rapid rate, especially for a company offering a well above-average dividend yield (5.9% versus 1.6% for the S&P 500). It could turn a $1,000 investment into a $59 (and rapidly growing) dividend stream at that rate. That's a lot more than the $16 of annual dividend income that same investment would generate in an S&P 500 index fund. 

Cashing in on the wind and sun

NextEra Energy Partners owns an extensive portfolio of clean energy infrastructure. It has 7.6 gigawatts (GW) of wind energy capacity, 1.5 GW of solar, and 240 megawatts (MW) of energy storage paired with renewable energy. It currently ranks as the world's seventh-largest wind and solar energy generator. The company sells the power it produces to utilities and corporate buyers under long-term power purchase agreements (PPAs). In addition, it has 4.3 billion cubic feet of natural gas pipeline capacity secured by long-term contracts. However, it plans to sell those assets over the next few years and redeploy the proceeds into growing its renewable energy portfolio.

Those agreements supply the company with predictable cash flow. NextEra Energy Partners expects to produce $770 million to $860 million of cash available for dividends (CAFD) this year, assuming it sells one of its natural gas pipeline assets. It plans to pay out about 80% of that cash to shareholders in dividends. That gives it a bit of a cushion while enabling it to retain some cash to help fund new income-producing investments.

The high-powered dividend growth should continue

NextEra Energy Partners has been a dividend growth juggernaut over the years. The company has increased its payout by nearly 350% since its formation in 2014. That has given it the power to produce a strong 10.7% average annual total return. 

Acquisitions are the main factor powering the company's rapidly rising dividend. NextEra Energy Partners acquires income-producing clean energy infrastructure from its parent company, leading utility NextEra Energy (NEE -1.36%), and third-party sellers. In addition, it will occasionally invest in organic expansion projects, such as adding battery storage to existing assets and repowering wind farms by replacing older turbines with newer, more powerful ones.

NextEra Energy owns an extensive and growing portfolio of renewable energy assets that it could drop down to its affiliate. NextEra Energy Partners estimates it can achieve its dividend growth target solely by acquiring additional assets from its parent. They recently agreed to their latest transaction, which will see NextEra Energy Partners acquire a 690-MW portfolio of operating wind and solar power assets from its parent for $708 million. The company estimates that the portfolio will generate $62 million to $72 million of annual CAFD, giving it additional funds to support and expand its dividend. These deals allow NextEra Energy to recycle capital into new renewable energy developments while supplying its affiliate with a steady stream of deals to power its dividend growth strategy. 

Future investments will help grow its cash flow, enabling it to increase the dividend. The company has many ways to fund its continued expansion, including existing liquidity ($2.5 billion at the end of the first quarter), retained cash after paying dividends, capital recycling (i.e., selling its natural gas pipelines and redeploying the proceeds into higher-returning renewable energy investments), and issuing new debt and equity.

Plugged into a powerful megatrend

NextEra Energy Partners has delivered high-powered dividend growth over the years by acquiring cash-flowing clean energy infrastructure from its parent and other sellers. That's given them the capital to invest in new renewable energy developments to support the global economy's decarbonization efforts while enabling NextEra Energy Partners to grow its cash flow and dividend. The company expects to continue acquiring income-producing renewable energy projects in the future, which should give it the power to continue rapidly growing its dividend. It looks like a smart place to invest $1,000 this month.