Dividend stocks can be a great way for investors to generate income from their portfolio and generate market beating returns long-term. And among dividend stocks, there's one energy stock that I think will pay a dividend for decades to come, one whose payout will crush most other dividend stocks today.
The yieldco you need to know about
8point3 Energy Partners (NASDAQ:CAFD) is the yieldco launched by First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) earlier this year. The company owns solar projects with predictable cash flows and long-term contracts to sell energy primarily to utilities around the country. Management projects that cash flows will be $68 million per year, which will grow as contracted prices escalate in future years; the average project has 22 years remaining on its contract.
This cash flow has resulted in a dividend payout of $0.22 per quarter, which is expected to rise 10%-15% in 2016. At today's price the stock yields 7.2% for investors, an incredible yield for such a stable payout.
The dual sponsor structure and inherent conservative nature of both First Solar and SunPower also provide greater stability than some competing yieldcos. The company had just $297 million in debt as of the end of the third quarter and holds all of its debt on the corporate level, rather than piling debt on individual projects. This leads to a more stable corporate structure long-term, as solar projects will degrade in output over time.
A surprise benefit of 8point3 Energy Partners
8point3 Energy Partners' dividend is impressive and should be safe for a long time, but it also comes with a lower-than-you-might-expect tax bill. Since the yieldco is buying projects and paying distributions based on cash flows from a large capital investment, the company is returning initial capital to investors, which is tax free. That means early dividends from the company will be marked as "returning capital to shareholders" instead of simply dividends on profits.
It's a subtle difference that will likely only be noticeable on the tax forms you get from your broker, but with dividend tax rates as high as 20% depending on your income the savings could be significant.
The risks to watch for with yieldcos
What could derail a great dividend like 8point3 Energy Partners'? The two big risks to watch for are rising interest rates, which could raise the cost of debt and make the dividend less competitive with bonds, and the falling competitiveness of solar energy.
I don't think there's much risk in 8point3's existing cash flows being negatively affected by lower cost fossil fuels, but growth in future dividends could be hurt by competitive pressures. Thus far, SunPower and First Solar have both benefited greatly from the 30% investment tax credit, which falls to 10% in 2017 for commercial projects -- so that reduced subsidy combined with higher interest rates could make it harder to buy projects for growth in the future.
A dividend for years to come
With long-term, contracted, predictable cash flows and a low tax rate, 8point3 Energy Partners is a safer dividend investment than most you can find on the market, and it has a lot of upside if dividends grow as predicted. And with sponsors that are well capitalized and willing to run the company in a sustainable manner, it's a dividend to buy and hold for at least the next decade.
Travis Hoium owns shares of 8POINT3 ENERGY PARTNERS LP CL A REP LIMITED PARTNER IN, First Solar, and SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.