Why I Recently Bought More of This Beaten-Down Ultra-High-Yielding Dividend Stock

Last year was brutal for NextEra Energy Partners (NEP -0.89%). The clean energy infrastructure company lost more than half its value as surging interest rates impacted its ability to fund its business and growth. That shellacking has pushed its dividend yield into the double digits.

I recently decided to take advantage of the sell-off by buying a few more shares of the renewable energy producer. While there's a near-term risk that it might need to reduce its big-time dividend, I think it has tremendous total return potential in the coming years.

A solid plan to shore up its financial foundation

NextEra Energy's cost of capital surged last year because of rising interest rates and its sagging stock price. That had a significant impact on the company. It couldn't get new funding at an attractive rate to refinance maturing debt, buy back the convertible equity portfolio financing (CEPF) it used to make acquisitions, or make new acquisitions.

That led the company to make two notable adjustments. The first change was to unveil plans to become a pure play on renewable energy by selling its natural gas pipeline assets in stages to help complete the buyouts of CEPFs maturing over the next few years.

NextEra Energy Partners closed the sale of its STX Midstream assets to Kinder Morgan late last year, netting $1.8 billion. It used that money to repay associated debt and pay down its credit facility so it could fund the buyouts of $1.1 billion of CEPFs due in June 2024 and June 2025. The company plans to sell its Meade Pipeline assets next year to help fund CEPFs maturing in 2026.

The company also revised its growth expectations last year to limit its capital requirements. It cut its dividend growth rate from 12%-15% annually through 2026 to 5%-8% with a target of 6%. NextEra Energy Partners also shifted its growth driver from acquisitions to repowering existing wind farms. These projects require less capital and generate higher returns, which will help grow its cash flow over the next few years to support a rising dividend.

NextEra Energy Partners' strategy would see it continue growing its high-yielding dividend for the next few years while shoring up its financial foundation. However, there is one major caveat. The company's plan puts its dividend payout ratio in the mid-90s through 2026. That's awfully high and leaves no room for error. If the company runs into any additional trouble, it might need to cut its dividend to retain more cash to help fund its strategy.

A massive long-term upside catalyst

NextEra Energy Partners' strategy shift should help return its cost of capital to an attractive level. That would put it in a better position to capitalize on the massive growth potential of the renewable energy industry. According to estimates, the U.S. will need to invest $4 trillion to decarbonize the economy by 2050 by building 7,000 gigawatts (GW) of renewable energy capacity. That should power accelerating growth in the sector. Renewable energy development is on track to increase from 175 GW in the 2023-2026 timeframe to 250 GW between 2027-2030.

The company could play an important role in helping finance new renewable energy projects. It serves as a funding vehicle for its parent, utility NextEra Energy (NEE -1.36%), which is a leading renewable energy project developer. NextEra had traditionally sold cash-flowing operating assets to its affiliate, giving it the cash to invest in new developments. Meanwhile, those deals have historically helped power NextEra Energy Partners' rapidly rising dividend.

Once NextEra Energy Partners can get its finances back on solid ground, it will be in a better position to accelerate its growth rate by making acquisitions from its parent again. It has the potential to create a lot of value for investors in the future by capitalizing on the massive growth ahead for renewable energy.

Powerful upside potential

NextEra Energy Partners has been under a lot of pressure over the past year because of the impact of surging interest rates on its strategy. However, it has a plan to address that issue while continuing to increase its high-yielding dividend. While there's still a near-term risk it might eventually have to reduce that payout to retain more cash, it has significant long-term growth potential. That could give it the power to produce strong total returns in the coming years.