A high dividend yield often signals that a company's growth days are in the rearview mirror. In many cases, the high-yielding income stream makes up most, if not all, of the return the company delivers for investors.
Given the lackluster returns of many high-yielding dividend stocks, investors seeking market-crushing returns will probably overlook Brookfield Renewable (BEPC +1.93%)(BEP +2.40%) because of its more than 5% yield. However, that could prove to be a big mistake. I predict this leading renewable energy dividend stock will crush the S&P 500's returns over the next decade. Here's why.
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A strong base return
A high-yielding dividend is sometimes a warning sign for investors. The company might have a weak financial profile or lackluster growth prospects. Neither of those is an issue for Brookfield Renewable. The opposite is true for this company.
For starters, the company backs its lucrative dividend with a top-notch financial profile. Brookfield Renewable sells about 90% of the renewable energy it produces under long-term, fixed-rate power purchase agreements (PPAs). Those PPAs have an average remaining term of 14 years while indexing about 70% of the company's revenue to inflation. That means Brookfield can bank on generating very predictable and steadily growing cash flow.
NYSE: BEPC
Key Data Points
The company estimates that the inflation escalation clauses embedded within its existing PPAs will power 2% to 3% annual growth in its funds from operations (FFO) per share. Meanwhile, power rates have been growing faster than inflation in recent years. That trend seems likely to continue, given the expected surge in power demand driven by catalysts like AI data centers. Brookfield anticipates that margin enhancement activities such as securing higher market power rates as legacy PPAs expire will add another 2% to 4% to its FFO per share each year.
On top of generating very stable and steadily rising cash flow, Brookfield has a strong investment-grade balance sheet. It funds its business with long-term, fixed-rate debt and keeps ample liquidity on hand, to the tune of $4.5 billion at the end of the first quarter. Brookfield also routinely recycles capital, selling mature assets to fund higher-returning new investments, which enables it to maintain its financial flexibility.
The company's combination of stable cash flow and balance sheet strength puts its more than 5%-yielding dividend on a sustainable foundation. It should provide investors with very bankable dividend income.
A powerful growth profile
Brookfield Renewable can grow its FFO per share at a 4% to 7% annual rate without investing any additional capital. That would be a solid growth rate for a high-yielding dividend stock.
However, the company has the financial flexibility to invest heavily in growing its platform. It's currently targeting to deploy $8 billion to $9 billion or more into new growth opportunities over the next five years.
Some of that capital will go into its massive backlog of renewable energy development projects. Brookfield currently has 74 gigawatts (GW) in its advanced-stage pipeline. That's nearly double its current operational capacity (43.3 GW). The company is ramping up its development capabilities to reach an annual commissioning run rate of 10 GW per year, which it expects to achieve by 2027. That's up from 8 GW this year. Development projects will add another 4% to 6% to its FFO per share each year.
On top of that, the company plans to continue making accretive acquisitions, largely funded through capital recycling, to further accelerate its FFO growth rate. Brookfield recently closed its acquisition of European renewable power developer Neoen. Meanwhile, it agreed to buy National Grid's U.S. onshore power platform, National Grid Renewables.
Add it all up, and Brookfield believes it can grow its FFO per share at a more than 10% annual rate through 2034. The company's growth is highly visible and secured through 2029 and increasingly visible and secured over the subsequent five-year period. That easily supports its plan to increase its dividend by 5% to 9% annually. Brookfield has grown its payout at a 6% compound annual rate since 2001.
It all adds up to the potential for producing market-crushing returns
Brookfield Renewable pays a more than 5% yielding dividend, which provides investors with a strong base return. On top of that, the company expects to grow its earnings per share at a rate of more than 10% annually for the next several years. That should easily support its plan to increase its already high-yielding payout by 5% to 9% per year. Put it all together, and Brookfield could produce total annual returns in the mid-teens, which should crush the S&P 500's return over the next 10 years. That makes it a great stock to buy and hold right now.
