I love collecting passive income because it provides me with more money to invest and increases my financial independence. My goal is to grow these income sources to eventually cover my basic living expenses.
Brookfield Renewable (BEPC 0.34%) (BEP 0.08%) is currently my largest source of dividend income. Despite already holding a sizable position, I recently purchased additional shares. I think the company's high-yielding passive income stream and robust growth potential can deliver high-powered total returns in the future. That's why I plan to buy even more shares in the future.
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A very sustainable payout
Brookfield Renewable currently pays $0.373 per share each quarter in dividends ($1.492 annually) on both its corporate shares (BEPC) and partnership units (BEP). I purchased additional partnership units because they trade at a significantly lower price (approximately $26.50 compared to $36.50 for the corporate shares). As a result, they have a much higher yield of around 5.5% compared to about 4.2% for the corporate shares.
That higher yield enables me to generate more passive income from every dollar I invest. I can make $5.50 annually for every $100 invested in BEP at a 5.5% yield versus $4.20 each year with BEPC's 4.2% yield.
However, there is a small catch. Partnership unit holders receive a Schedule K-1 for federal tax purposes each year, which can require more complex tax reporting compared to holding corporate shares. While this can add some tax filing complications, I find the higher income yield on an economically equivalent entity is worth the extra effort.
The company's high-yielding payout rests on a very sustainable foundation. Brookfield sells about 90% of its power capacity to utilities and large corporations under power purchase agreements (PPAs) with an average remaining term of 14 years. These PPAs index 70% of Brookfield's revenue to inflation, resulting in stable, predictable, and growing cash flow.
Brookfield Renewable also has a strong investment-grade balance sheet, backed by long-term, fixed-rate debt. The company maintains robust liquidity ($4.5 billion at the end of the second quarter), which it routinely replenishes by selling mature assets as part of its capital recycling strategy.
The company's durable cash flow and conservative balance sheet provide a solid foundation for its high-yielding dividend.
High-powered growth
Brookfield Renewable has grown its dividend at a 6% compound annual rate since 2001. The company aims to increase the payout by 5% to 9% per year in the long term.
The company should have ample power to achieve its dividend growth target. Brookfield's existing portfolio provides a strong foundation for growing the dividend. The company estimates that inflation escalation clauses in its long-term PPAs will increase its funds from operations (FFO) by 2% to 3% annually.
Meanwhile, it sees a significant opportunity to sign new PPAs at higher rates as legacy agreements expire. For example, Brookfield signed 20-year deals with Google for 670 megawatts of hydroelectric capacity at two facilities, representing over $3 billion in future revenue. That deal was part of a first-of-its-kind hydro framework agreement with the tech giant to deliver up to 3 gigawatts (GW) of hydropower in the coming years. Margin-enhancing activities, such as recontacting, could add another 2% to 4% annually to its FFO per share.
Brookfield also leverages its financial flexibility to invest in renewable energy projects and acquisitions. The company is expanding its development capabilities and aims to achieve 10 GW of annual capacity additions by 2027. Brookfield has secured PPAs for a significant portion of this capacity, including a plan to develop 10.5 GW for Microsoft between 2026 and 2030. These projects should raise its FFO per share by 4% to 6% annually.
Additionally, Brookfield expects M&A funded by its capital recycling activities to further boost its FFO per share. It recently agreed to invest up to $1 billion to raise its stake in Isagen to 38%, which should increase its FFO per share by 2% next year. It also took part in the $1.7 billion acquisition of National Grid Renewables.
These growth catalysts drive Brookfield Renewable's confidence in delivering more than 10% compound annual FFO per share growth through 2030.
High-powered total return potential
Brookfield Renewable is a cornerstone income stock in my portfolio. The renewable energy company pays a sustainable and steadily growing dividend. Meanwhile, there is a lot of growth ahead, driving my high confidence that it can produce robust total returns in the future. That's why I've made it one of my largest dividend holdings and expect to continue growing that already sizable position in the future.
