The Best Energy Dividend Stock for a Lifetime of Passive Income

The energy industry has historically been a great sector for making passive income. Many energy companies generate stable cash flows backed by long-term contracts and regulated rates, enabling them to pay attractive dividends.

While the energy sector is currently transitioning, it's heading toward a more sustainable future powered by renewable energy. Because of that, companies focused on cleaner energy sources should be able to generate decades of sustainable cash flow. One of the leaders of the transition to a cleaner future is Brookfield Renewable (NYSE: BEPC)(NYSE: BEPC). That's one of the many reasons it stands out as the best stock in the sector for those seeking enduring passive income.

Built for generating income

Brookfield Renewable has all the features needed to deliver durable passive income to its investors. It has a globally diversified portfolio of lower-carbon businesses, including hydroelectric, wind, solar, energy storage, green hydrogen, energy transition, and carbon capture. It sells the power these facilities generate to utilities and large corporate buyers under long-term, fixed-rate power purchase agreements, most of which feature annual escalation clauses. That enables Brookfield to produce very stable cash flow to support its dividend, currently yielding 3.1%.

Meanwhile, Brookfield complements its durable portfolio with a top-notch financial profile. Brookfield has investment-grade credit, a well-laddered debt profile of primarily fixed-rate financings, and lots of liquidity. That gives the company lots of financial flexibility. Brookfield also pays out a reasonable amount of its stable cash flow via its dividend (76% so far in 2022), providing it with a cushion while allowing it to retain cash to help finance its continued expansion.

With a business generating lots of stable cash, a reasonable dividend payout ratio, and a strong balance sheet, Brookfield's dividend is on rock-solid ground.

Powerful growth ahead

Brookfield has also done an excellent job growing its dividend over the years. The company delivered its 11th consecutive year of increasing its payout by at least 5% earlier this year and has grown it at a 6% compound annual rate since 2000. It expects to increase its dividend at a 5% to 9% annual rate over the long term.

It should have ample power to deliver on that objective. Brookfield estimates that a combination of higher power prices, improving margins, and development projects will grow its funds from operations per share by 6% to 11% per year through 2026. It also has an enormous development pipeline to support high-end growth, with its backlog more than triple its current operating portfolio.

Meanwhile, it sees acquisitions adding up to another 9% to its bottom line each year. That sets Brookfield up to grow its dividend at a healthy rate while lowering its dividend payout ratio, putting the payout on an even more sustainable long-term foundation.

The company has an enormous opportunity to grow beyond that timeframe. It estimates a more than $150 trillion commercial opportunity over the next 30 years to decarbonize the global economy. That should enable the company to continue growing its renewable energy operations while capitalizing on the emergence of new growth opportunities like carbon capture and green hydrogen. Given its strong balance sheet, Brookfield has ample financial flexibility to continue expanding in the coming years.

A durable dividend income stream

Brookfield Renewable has been an outstanding passive income stock over the years. That should continue in the future. It built its business around generating sustainable income. Meanwhile, given its leverage to the decarbonization megatrend, it has plenty of growth ahead, which should give it the power to continue increasing its dividend. Those features make it stand out as one of the best energy stocks for those seeking a durable passive income stream that can last a lifetime.

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Matthew DiLallo has positions in Brookfield Renewable Corporation Inc. The Motley Fool has positions in and recommends Brookfield Renewable Corporation Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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