NextEra Energy Partners (NEP 2.85%) has gotten eviscerated in recent weeks. Shares of the renewable-energy producer crashed more than 70% from their 52-week high, with the sell-off accelerating after the company stomped on the brakes by slashing its dividend-growth forecast. That decline pushed its dividend yield into the mid-teens. 

I think the sell-off is a massive overreaction. That's why I recently bought more shares. Here's why I believe the company's decision to slow down makes sense.

Adjusting to a new reality

NextEra Energy Partners has been a dividend-growth juggernaut since leading utility NextEra Energy (NEE 1.28%) formed the company in 2014:

 NEP Dividend Chart

NEP Dividend data by YCharts.

It has increased its dividend every quarter. Overall, it has boosted its payout by a jaw-dropping 355.5%. 

Drop-down acquisitions of income-producing clean-energy infrastructure from NextEra Energy had been the primary fuel source driving that rapidly rising payout. The company initially anticipated it could continue growing its dividend briskly, powered by more drop-down deals. NextEra Energy has a vast and growing portfolio of income-producing, renewable-energy assets that it could drop down to its affiliate. That fueled NextEra Energy Partners' outlook that it could increase its payout by 12% to 15% annually through at least 2026.

However, while it has plenty of acquisition opportunities, its cost of capital has skyrocketed due to higher interest rates and its sinking share price. Because of that, acquisitions aren't as accretive as they once were. That led the company to shift its growth strategy.

It now plans to focus on internally funding organic-growth capital projects with post-dividend free cash flow and capital recycling (selling assets to fund new investments). These projects (mainly repowering existing wind farms and adding battery storage) have much higher returns than drop-down acquisitions, especially since it's funding them primarily with retained earnings. However, given its relatively high-dividend payout ratio (in the mid-80% range this year), it's not retaining a lot of cash to fund these investments. As a result, NextEra Energy Partners is cutting its dividend-growth forecast to 5% to 8% per year through at least 2026, with a target of delivering 6% annual-dividend growth. 

Still a solid growth rate

NextEra Energy Partners' reset dividend-growth rate is still pretty good. It aligns with its income-focused renewable energy peers Brookfield Renewable (BEP 0.58%) (BEPC 0.77%) and Clearway Energy (CWEN 0.47%) (CWEN.A 0.23%). Brookfield is targeting 5% to 9% annual-dividend growth over the long term, while Clearway sees dividend growth toward the upper end of its 5% to 8% yearly target range through 2026. 

Meanwhile, the company's internally focused growth and funding strategies are now more in line with its peers. Clearway Energy sold its thermal assets in 2022, giving it nearly $1.4 billion in cash proceeds to recycle into higher-returning investments. The company has secured investments to put all that capital to work on projects that will commence operations over the next couple of years. Those investments will grow its cash flow to support its dividend-growth plan. 

Internal growth also fully supports Brookfield's dividend-growth plan. The company expects organic growth drivers (inflation-indexed rate increases, margin-enhancement activities, and development projects) to grow its funds from operations (FFO) by 7% to 12% annually through 2028. On top of that, Brookfield sees acquisitions funded through capital recycling and its Brookfield Global Transition Fund strategy, potentially adding more than 9% per year to its FFO. However, it can achieve its dividend-growth target without acquisitions.

Punished for a sensible move

Higher interest rates forced NextEra Energy Partners to shift gears and slow down. While investors punished the company for the move, it makes sense. It's a more sustainable strategy that aligns more with its peers. That's why I recently took advantage of the sell-off to add more shares to my portfolio.