Editors Note: In a previous version of this article, the author stated Hannon Armstrong Sustainable Infrastructure Capital (HASI) was in the process of changing into a REIT. However, HASI is already a REIT. The Fool regrets the error.
As solar stocks continue to burn bright, many people are suggesting that a bubble has formed and will be bursting sometime soon. I agree that there are some companies in the space that are grossly overvalued and are at risk of crumbling in the near future, but I think that the bubble theory is primarily being promoted by people unwilling to recognize what strides solar has made in the energy industry over the past few years.
Renewable energy stocks are volatile, and though there's a chance of big gains, there is also the possibility of big losses. Nonetheless, solar and wind energy is rapidly gaining acceptance from residential and commercial consumers, and as states move to meet renewable portfolio standards, utilities are also adopting solar and wind power.
Investors with a long-term time horizon can be rewarded handsomely if they have the patience to stick it out, and investing in dividend paying companies is one way to make the wait more manageable.
Recognizing the pattern
One interesting dividend paying company is Pattern Energy Group (PEGI), which is in its infancy as a publicly traded company, having IPO'd in September. A premium independent power company, Pattern Energy owns and operates eight wind power projects in the U.S., Canada, and Chile, and it has six projects (746 MW) under development, It declared a quarterly cash dividend of $0.3125 (annualized $1.25) that will be paid on January 30, 2014 to shareholders of record as of December 31, 2013.
Hatchet Ridge Wind Farm, Source: Pattern Energy Group
Mike Garland, president and CEO of Pattern, is confident that the company will be able to sustain the dividend and grow it in the future: "With long-term contracted revenue streams from our existing assets and an identified pipeline of attractive growth opportunities, Pattern is well-positioned to provide returns to shareholders in the form of a dividend, which we will look to increase as we grow our cash flow per share." The company operates in a similar way to an MLP, generating cash flow by selling its power to companies. Its long-term contracts average out to be around 19 years, and it expects to return about 80% of its cash flow to investors in the form of dividends.
With such a recent IPO, it's difficult to judge just how sustainable the dividend is, so the degree of risk is fairly high. However, the company did provide earnings figures for comparable periods last year that provide some reassurance that the dividend can be safely sustained. Revenue increased, net income increased, and cash available for distribution increased.
Although wind energy is the company's bread and butter, it is also interested in exploring the incorporation of solar projects into its portfolio. In an interview with Bloomberg, Garland said, "We are in negotiations on a number of solar projects. It fits our model nicely."
Building the future
Another company to consider as a high yield play is Hannon Armstrong Sustainable Infrastructure Capital (HASI -2.93%), a provider of capital for sustainable infrastructure projects. On the most recent earnings call, Brendan Herron, Hannon Armstrong's CFO, characterized the company as earning money by "by holding our assets on our balance sheet or by selling off originated projects to institutional investors in exchange for fee income." Having closed its IPO last April, Hannon Armstrong is a real estate investment trust, or REIT and must distribute at least 90% of its taxable income to shareholders. For the most recent quarter, Hannon Armstrong completed over $200 million in transactions and elected to raise its dividend from $0.06 per share to $0.14 per share. The company is looking to increase its dividend to offer an over 7% yield by the fourth quarter.
Its pipeline of $2 billion in investment opportunities suggests that the company has no intentions of slowing down -- not to mention that it reported third quarter core earnings of $2.3 million, or $0.14 per share, as compared to core earnings of $1.1 million, or $0.07 per share, in Q2 2013. In terms of the future, management further stated on the earnings call that, "in total, we are targeting 13% to 15% earnings per share annual growth in addition to the 7% yield over the next couple of years for total returns of 20% or more."
Lots of energy behind this yield
Perhaps a less risky way to collect green dividends is to look to NRG Yield (CWEN -1.67%), which owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States. NRG Yield's portfolio is, in part, comprised of eight utility-scale solar and wind facilities and two portfolios of distributed solar facilities that collectively represent 1,324 megawatts (MW) of generation capacity.
The company seems committed to enthusiastically growing its dividend in the future. In its third quarter earnings call, management stated the following goals for its dividend:
- Annualized quarterly dividend expected to increase to $1.45/share by 3Q14
- Targeting minimum dividend increase of 1% per quarter, thereafter
- Dividend to be augmented by dropdowns, third party acquisitions, and financings
These lofty goals are backed by NRG Energy (NRG -1.49%), which holds a 65.5% stake in the company; furthermore, NRG Yield retains the right of first offer to acquire six recently completed projects, which total 1.059 MW of net generating capacity.
Some Foolish final words...
If you've read some of my previous articles, you are surely aware of my conviction that alternative energy will become an increasingly important part of the energy industry. In fact, I am so confident in the promise of Pattern Energy's future that I will be making an outperform CAPS call on the company.
As for Hannon Armstrong and NRG Yield, I believe that both offer interesting theses for investment. Although both are dependent on the success of renewable energy development, they offer two very different approaches for investment. Naturally, interested investors should dig deeper to see which one fits best for them.
