Investing in renewable-energy stocks doesn’t mean investors have to buy high-risk companies that may never grow to any significant scale in energy markets. There are ways to buy operating renewable-energy assets owned by companies with a number of growth and dividend strategies.
Three of our Motley Fool energy contributors got together and highlighted their favorite renewable energy dividend stocks. The names that make their way to the top are Brookfield Renewable Partners (NYSE:BEP), Clearway Energy (NYSE:CWEN), and Atlantica Sustainable Infrastructure (NASDAQ:AY).
Slow and steady wins the race
Travis Hoium (Brookfield Renewable Partners): Yieldcos like Brookfield Renewable Partners were all the rage in renewable energy just a few years ago, but there are very few of them left standing today. At their core, yieldcos were simply a renewable energy asset ownership vehicle that would spit out regular dividends, but companies got in trouble by trying to grow too quickly. The former flagship of the industry, SunEdison, even ended up in bankruptcy because of its aggressive financing tactics.
Brookfield Renewable Partners has weathered the storm because it isn’t built like other yieldcos. The company doesn’t issue new equity shares to drive growth and doesn’t take on too much debt; it grows organically by keeping some of its excess cash renewable projects provide to fund new acquisitions. The rest is used to pay a dividend, which yields 4.4%, and management expects to grow dividend distributions by a modest 5% to 9% each year. That’s below the 12% to 15% target that got yieldcos in trouble a few years ago, but in this case, slow and steady wins the race.
On the asset side, Brookfield Renewable Partners has long been a big player in hydropower, which comprises 74% of its 19,300 megawatt (MW) portfolio, but that’ll change when it completes the acquisition of sister yieldco TerraForm Power. The all-stock deal will add 4,200 MW of wind and solar assets to the portfolio and make this one of the biggest renewable energy companies in the world.
Brookfield Renewable Partners isn’t going to be a flashy stock for investors, but it plays a critical role in renewable energy. The company buys renewable energy assets with long-term contracts to sell electricity to utilities, funding the work manufacturers and developers do to get these projects done. It provides shareholders a stable dividend that they can count on for years to come, given those long-duration contracts. And it just so happens it helps the world be a little greener. That’s the kind of dividend stock I want to own today.
A windfall for shareholders
Howard Smith (Clearway Energy): When California-based utility PG&E (NYSE:PCG) completed its restructuring and emerged from bankruptcy protection on July 1, 2020, shareholders of Clearway Energy were among the beneficiaries. Clearway, which owns and operates a portfolio of clean-energy generating capacity, counts PG&E as one of its largest customers. Clearway sells its electricity to power utilities under long-term contracts.
With PG&E in bankruptcy protection, Clearway was unable to access almost $168 million of cash from its supply contract. In its second-quarter earnings release, Clearway Energy president and CEO Christopher Sotos said, “With the emergence of PG&E from bankruptcy, Clearway’s impacted projects are now able to distribute cash in the normal course allowing the Company to reestablish its dividend in-line with long-term targets.” The result was a 49% quarterly dividend increase for the third quarter of 2020, creating an almost 5% dividend yield at the current share price.
The resolution of the PG&E situation allows investors to focus on Clearway’s growth strategy while collecting a generous level of income through what should continue to be an increasing dividend. The company has targeted an annual dividend growth rate of between 5% and 8%. A five-year look shows the trajectory of that growth prior to the disruption caused by the PG&E bankruptcy filing.
The dividend payouts will be supported by increasing investments in green-energy projects. These include closing its 144 MW Rattlesnake Flat wind farm project in Washington later this year, and the 55 MW Pinnacle wind project in West Virginia in 2021. The company’s development pipeline includes a total of almost 9 gigawatts (GW) of wind and solar projects across 22 states.
These projects serve to increase cash available for distribution. Clearway seeks to maintain a payout ratio of between 80% and 85%, showing its commitment to returning capital to shareholders. Investors looking for income growth supported by renewable-energy generation have an ideal candidate in Clearway Energy.
Back to growth
Jason Hall (Atlantica Sustainable Infrastructure): Over the past several years, Atlantica has gone through some turmoil, after its former parent company, Spanish energy company Abengoa, sold its stake to Canadian utility Algonquin Power. However, one clear bright spot is its CEO, Santiago Seage, who has been in the big chair since Atlantica was founded in 2013, and has run Abengoa’s solar business (the predecessor entity to Atlantica) since 2006.
With tenured and experienced leadership in place, and a financially strong partner that seems committed in Algonquin, Atlantica looks primed to reignite its growth. Revenue fell 8% in the first half of 2020 as solar output declined (something many solar power producers experienced). But the company is ready to deploy several hundred million dollars in new assets in the near future. These assets will add per-share cash flow growth quickly, helping fund future dividend growth.
Moreover, the costs of capital are falling sharply. As Atlantica’s CFO pointed out on the second-quarter earnings call, the interest rate on its most recent debt was 1.9%, compared to the prior bonds it intends to repay at 4.2%.
For investors today, Atlantica’s renewable energy production, power transmission, and water desalination businesses generate sustainable cash flows that more than support the $0.41 per share quarterly dividend. That works out to a 5.4% yield at recent prices. With a strong dividend and strong growth prospects, Atlantica is worth buying and holding for the long term.
Steady dividends in renewable energy
The common theme here is that companies that own renewable energy assets and us their cash flow to pay dividends can be great income generators in the long run. If you have written off renewable-energy stocks until now and are looking for some dividends for your portfolio, Brookfield Renewable Partners, Clearway Energy, and Atlantica Sustainable Infrastructure are three great renewable energy dividends to start with.