This Ultra-High-Yield Dividend Stock Slams the Brakes on its Growth Plans

NextEra Energy Partners (NEP -0.89%) had bold plans to grow its already high-yielding dividend (currently over 8%) by 12% to 15% annually through 2026. However, that target has turned out to be overly ambitious. It assumed the company could continue to raise capital at attractive rates. That's no longer the case, given the surge in interest rates and the plunge in its stock price.

Those headwinds are causing the renewable energy stock to significantly reduce its distribution growth forecast. Here's a look at its revised plan and what that means for income-seeking investors.

Hitting the brakes

NextEra Energy Partners is revising its dividend growth forecast to 5% to 8% annually through at least 2026, with a target growth rate of 6% annually. That's roughly half the growth rate previously anticipated. 

The factor driving the reduction is the current interest rate environment. Higher rates have made it more expensive to raise outside capital to finance its growth strategy. It has weighed on its unit price, pushing down its valuation and driving up its dividend yield. That made issuing more stock to fund new investments more dilutive to existing investors. Meanwhile, higher rates raised the cost of new debt.

By slowing its growth rate, NextEra Energy Partners won't have to issue any new equity to finance its revised plan until 2027. It will instead finance growth through retained cash after paying dividends, new debt, and its capital recycling program. The company previously announced its plans to sell off its natural gas pipelines and use the proceeds to fund the buyouts of its convertible portfolio equity portfolio financing payments through 2025. 

While the company doesn't plan to issue new equity until 2027, it could opportunistically sell stock if market conditions improve and its share price recovers.

Shifting its strategy

NextEra Energy Partners is also shifting its investment focus. The company had previously anticipated drop-down transactions with its parent company, utility NextEra Energy, would be its main growth driver. It now plans to focus on higher-yielding investment opportunities to drive growth.

It anticipates that organic investments, like repowering the bulk of its wind energy portfolio (i.e., replacing older wind turbines with newer, larger, and more powerful ones), will drive growth in the short-to-medium term. The company will also look to acquire renewable assets from NextEra and third parties as higher-yielding opportunities become available. 

The company's new dividend growth rate and internal funding strategy more closely align with the approach of its peers Brookfield Renewable Partners (BEPC 0.09%) (BEP 0.19%) and Clearway Energy (CWEN 0.26%) (CWEN.A 0.28%). Brookfield targets 5% to 9% annual dividend growth, while Clearway sees dividend growth in the upper end of its 5% to 8% yearly target range through 2026.

Both companies primarily fund organic growth internally and external expansion through capital recycling. Clearway sold its thermal assets in 2021 and is recycling that capital into higher-yielding renewable energy investments. It has already secured all the investments needed to power its plan and deliver higher-end dividend growth through 2026. 

Meanwhile, Brookfield can support its dividend growth plan through organic growth drivers. A combination of higher power prices, margin expansion, and its development pipeline (funded through retained cash flow) will power 7% to 12% annual growth in its funds from operations (FFO) per share through 2028. In addition, M&A activities, primarily funded through its capital recycling and transition funds strategies, could fuel over 9% FFO per share growth over that time frame.

NextEra Energy is now following those more sustainable blueprints. The company can still deliver a solid growth rate by focusing on internally financing higher-return organic projects. This new approach will reduce its need to tap the volatile capital markets to fund its expansion.

Slowing down makes sense

The days of cheap financing are over. That's forcing NextEra Energy Partners to revise its growth outlook to a rate it can fund internally. It's a smart move because it will put the company on a much more sustainable financial foundation over the longer term. It can always reaccelerate when market conditions improve.

The company's lower-risk approach makes it an even more attractive option for investors seeking a sustainable, high-yielding income stream that should still grow at a decent rate.