Clean energy has become the biggest source of new investment for utilities and companies around the country. In 2016, wind and solar energy will account for most of the new electricity generation built in the U.S. and that creates a huge investment opportunity.
One of the best ways to invest directly in clean energy and generate a solid dividend is through yieldcos, which buy and own renewable energy projects with contracts to sell energy to customers. Four of the best yieldcos to own in 2017 are Pattern Energy Group Inc. (NASDAQ: PEGI), Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI), 8point3 Energy Partners LP (NASDAQ: CAFD), and NRG Yield Inc. (NYSE: NYLD).
The do-it-all clean energy company
Hannon Armstrong Sustainable Infrastructure Capital finances everything from renewable power plants to efficiency programs. It provides debt and equity financing to governments and large corporations that want the savings of efficiency or clean energy without the financial outlay. The structure allows the company to finance unique opportunities that other energy companies may overlook.
As long as the projects Hannon Armstrong finances generate a higher rate of return than any combination of debt and equity it uses to finance them, the company can grow the business and the dividend. And right now the dividend is yielding 6.8% for investors.
What makes Hannon Armstrong attractive in today's energy market is its flexibility in the assets it funds. While most of the market is focused on how to fund wind or solar projects, Hannon Armstrong is looking at efficiency and other infrastructure improvements that provide strong returns and low risk. That's a combination investors in clean energy should love.
The solar dividend stock
8point3 Energy Partners LP is the yieldco creation of First Solar and SunPower, two of the largest solar developers in the world. It buys solar projects exclusively from its two sponsors and pays out cash flow from projects to investors.
One of the big draws to 8point3 Energy Partners is the quality of the assets it owns. First Solar and SunPower have the best solar technology in the industry and have a long track record of successful installations, so operational risk is low. The other big advantage is that there are two sponsors for the yieldco.
When there's a single sponsor for a yieldco, the sponsor can 'captivat'e the yieldco, using it as a piggy bank to buy projects from the developer. It could pay excessively high prices or take on risks it wouldn't normally take without independent oversight. The most egregious example is TerraForm Global buying 425 MW of uncompleted Indian projects from SunEdison, only to see SunEdison go into bankruptcy and never get the projects completed. Another party watching over the acquisition of new assets helps reduce risk of being held captive by the sponsor.
8point3 Energy Partners' 7.4% dividend yield comes with long-term contracts with high-quality counterparties and a relatively low leverage balance sheet as well. That makes it a great clean energy dividend for investors with lots of upside as the solar industry grows.
The wind yieldco
A yieldco that focuses on wind is Pattern Energy Group Inc., which has built wind farms for Amazon.com, Google, and Wal-Mart, to name a few. Like other yieldcos, it builds projects with the backing of a long-term power purchase agreement, normally backed by a corporation. This is a booming market right now as companies look for ways to buy clean energy for their businesses without outlaying the funds for construction.
Many developers may struggle in 2017 because utility demand for renewable energy is going to decline due to little need to hit renewable energy mandates. But companies are going to drive the industry forward, which plays into Pattern Energy Group's hands because it is its core business.
The dividend yield of 8.4% is also among the highest in the yieldco industry today. And with the cash flows from wind projects contracted for decades to come, that payout could pay off for a long time for investors.
One of the first yieldcos on the market was NRG Yield. The company started with a few fossil fuel plants, some wind assets, and some solar farms. Today, it's primarily a renewable energy company with over 4 GW of generating assets.
The company's sponsor, NRG Energy, is a utility with a large fleet of generating assets across the country, but lately it's been seeing renewable energy as an opportunity for investment. It recently bought 1.5 GW of renewable energy assets from bankrupt SunEdison and many of those assets will presumably make their way to NRG Yield eventually.
As a yieldco with a utility tie, NRG Yield can also be an opportunistic buyer of assets that come available in the open market. The SunEdison assets are an example of opportunistic buying, and with developers needing to unload projects as they're completed in the next year or two, there could be opportunities to acquire assets at a high rate of return, something limited yieldcos like 8point3 Energy Partners won't do.
Right now, the stock yields 6.5%, and with NRG Yield's pipeline of renewable energy assets, I think there's plenty of room for growth.