Brookfield Renewable (BEPC) (BEP -1.94%) currently sits about 15% below its 52-week high. This slump has pushed the renewable energy producer's dividend yield up over 5%. That's several times higher than the S&P 500's current dividend yield of less than 1.5%.
A high dividend yield isn't Brookfield Renewable's only draw. The leading global renewable energy producer is growing briskly. Add that to its lower valuation, and the company could produce supercharged total returns in the coming years. That makes now a great time to buy the stock.
A lucrative passive income stream
Brookfield Renewable has been a great income-generating investment over the years. The renewable energy company has distributed cash to its investors since 2001, growing its payout at a 6% compound annual rate during that timeframe. This marked its 13th straight year of increasing its payout by at least 5%.
The company backs its lucrative and steadily rising payout with durable cash flows. It sells about 90% of the power generated by its diversified global portfolio of renewable energy assets under long-term contracts with utilities and large corporate buyers. Most agreements link power rates to inflation, accounting for 70% of its revenue. These contracts provide Brookfield with steadily rising cash flow. Inflation alone should boost its funds from operations (FFO) by 2% to 3% per year.
Brookfield compliments its stable cash flow profile with a strong balance sheet. It has a solid investment-grade credit rating and primarily uses long-term, fixed-rate debt. The company also has lots of liquidity, with $4.4 billion at the end of the second quarter, which it routinely replenishes by recycling capital. It expects to generate about $1.3 billion in asset sale proceeds this year to fund new investments and maintain its financial flexibility.
Powerful growth drivers
While Brookfield's lucrative distribution is a big draw, it's only part of the investment thesis. The company is delivering high-powered earnings growth. It has grown its FFO per share at a 12% annual rate since 2016. It expects to continue growing its earnings at a double-digit rate through at least 2028.
In addition to inflation-driven rate increases, Brookfield anticipates that its margin enhancement activities -- for example, providing ancillary services to existing customers and securing higher rates on its uncontracted capacity -- will add another 2% to 4% to its FFO per share each year. On top of that, the company has a massive development pipeline. It currently expects to complete 7 gigawatts of development projects this year and is scaling up to commission an average of 10 GW annually over the next several years. Development projects should add another 3% to 5% to its FFO per share each year.
Finally, Brookfield expects its capital recycling strategy will enable it to continue completing accretive M&A transactions to boost its FFO-per-share growth rate into the double digits. The company has secured three new deals this year. Brookfield and its partners are buying European renewable energy producer Neoen in a two-step transaction, a $540 million investment. The company also bought Leap Green, a leading wind-focused company in India, a $40 million investment; and it made its first investment in South Korea, with Hanmaeum Energy for $100 million.
Brookfield Renewable's rapidly rising earnings should support continued dividend growth. It's targeting to increase its payout by 5% to 9% per year.
Powerful total return potential
Thanks to its sell-off, Brookfield Renewable offers investors a rock-solid income stream currently yielding more than 5%. That provides investors with a solid base return. On top of that, it expects to grow its FFO per share by more than 10% per year and its dividend by 5% to 9% annually. Add it all up, and Brookfield should have the power to generate average annual total returns in the mid-teens. That's a strong return from a higher-yielding dividend stock. That combination of income, growth, and value makes Brookfield look like a very compelling stock to buy right now.
