High-yield dividend stocks can be a great way for investors to generate cash returns from investing, but they aren't always the most stable, and the high yield itself can mean the market may not think a dividend is sustainable. But not all high-yield stocks are high-risk.
Within the energy sector, renewable energy is a great place to find sustainable dividends that will pay investors for decades to come. Here are four investors shouldn't overlook.
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The Brookfield portfolio of dividends
Brookfield Asset Management (NYSE: BAM) has become one of the biggest renewable energy owners in the world through a series of companies it controls. Two high-yield stocks of note are Brookfield Renewable Partners (NYSE: BEP) and TerraForm Power (NASDAQ: TERP) .
Brookfield Renewable Partners owns 7,878 megawatts (MW) of hydroelectric generating assets, 3,619 MW of wind, 1,533 MW of solar, and 2,698 MW of energy storage assets. These assets generated $2.74 billion in revenue over the past year and $608 million in funds from operations (FFO), a measure of cash generated after operating expenses.
What makes Brookfield Renewable Partners unique among energy yieldcos is that management aims to pay out just 70% of FFO as a dividend. The rest of the cash is used to acquire projects that aim to grow the business 5% to 9% organically annually, meaning the company doesn't have to use its stock as a tool to fund growth. With a dividend yield of 6.5% and more organic growth ahead, the company is a great long-term buy.
TerraForm Power was an offshoot of now-bankrupt SunEdison , but survived when Brookfield Asset Management took a controlling interest and sponsorship in the yieldco. That's brought some of the same management style to the company as Brookfield Renewable Partners.
TerraForm owns 2,600 MW of energy assets, with 33% coming from wind and 67% from solar. These projects also come with contracts to sell energy to utilities, averaging 14 years of contracted life remaining across the fleet.
The company aims to pay out 80% to 85% of cash available for distribution (CAFD) and grow its dividend 5% to 8% annually in the long term. With an expected dividend of $0.76 in 2018, a yield of 6.6%, this a dividend to count on for a decade to come.
The wind dividend
Pattern Energy (NASDAQ: PEGI) is a yieldco that owns wind projects around the world , currently boasting 2,942 MW in its portfolio. These projects come with long-term contracts to sell energy to utilities, known as power purchase agreements (PPAs), which are what fund the company's 8.7% dividend yield.
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Pattern Energy is steadily growing through its affiliate Pattern Development 1.0, which is a renewable energy development company. In the first quarter, the company bought 206 MW of projects in Japan that have 20-year PPAs with utilities. It also bought 84 MW of Japanese projects for $131.5 million, which will add an average of $13.3 million to CAFD each year over the next five years. A $194.0 million acquisition of 122 MW will also add $20.9 million of CAFD when completed in 2021.
The challenge for Pattern Energy is that its high dividend yield makes it tough to sell shares to fund further acquisitions. The hurdle rate, or rate of return, management must generate to justify using stock sales to buy projects is so high that it will limit growth acquisitions. So, I wouldn't consider this a growth dividend, but the high yield and steady cash flow from wind projects still makes it a great stock for investors to own today.
The yieldco pioneer
NRG Yield (NYSE: NYLD) (NYSE: NYLD-A) is a yieldco that's gone through a major transition, as its original sponsor, NRG Energy , has decided to sell its stake in the company to Global Infrastructure Partners (GIP). The deal is expected to close in the second half of the year and is already bringing some stability to the company.
Since the deal was announced, NRG Yield's bonds have seen their yield fall by 75 basis points , lowering the cost of capital for future project acquisitions. As for existing operations, NRG Yield expects 2018 adjusted EBITDA to be $950 million and CAFD of $280 million, which will leave about $35 million to pay down debt or fund growth after paying an annualized $245 million, or $1.32 per share, dividend by the end of the year.
One of the changes GIP is expected to bring is a more conservative financial structure. Projected debt balances are expected to fall from $6.77 billion to end 2017 to $4.45 billion to end 2022. This will be done by naturally allowing debt to amortize and won't impact the dividend or dividend growth.
NRG Yield has been a forgotten asset for NRG Energy, but should get some renewed life under GIP. The investment firm is already backstopping the $365 million acquisition of a solar facility, indicating that it will use its financial muscle to make sure NRG Yield succeeds. That's the kind of support a yieldco needs and is why I think the stock's 6.8% dividend yield has more room to grow.
High-yield stocks don't have to be high-risk
Each of these stocks has a dividend yield over 6% and has stable, contracted cash flows for many years into the future. As the renewable energy industry grows, these companies have the opportunity to grow by using excess cash or stock to fund acquisitions, growing their dividends along the way. If you're looking for great energy dividends today, these stocks are a great place to start.
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Travis Hoium owns shares of Pattern Energy Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .