Finding energy stocks with high dividend yields and stable businesses is tough today. Many oil companies are spending more on dividends and capital expenditures than they make in operating cash flow, and that's even after slashing capital spending, which will hamper future cash flow. Utilities, which have long been safe dividend stocks, are also coming under pressure: Consumers are generating their own energy with rooftop solar, and low wholesale power prices are dampening earnings from wholesale subsidiaries.
Amid the rapidly changing energy sector, there are some great dividend stocks worth buying with yields over 5%. And 8point3 Energy Partners (NASDAQ: CAFD), Pattern Energy Group (NASDAQ: PEGI), and Total (NYSE: TOT) are at the top of my list.
Solar energy's high-yield yieldco
Renewable-energy yieldcos are built to be dividend machines. Projects acquired usually have power-purchase agreements (PPAs) to sell energy to utilities for 20 years or more, creating a predictable stream of cash flows. In the case of 8point3 Energy Partners, contracts to sell solar energy to utilities average nearly 20 years in length and the energy production from the sun is highly predictable (more so than wind). This gives a great foundation for a dividend stock.
Right now, 8point3 Energy Partners has a 7.3% dividend yield, which investors can predict will at least stay flat based on the PPAs' underlying projects. And there's upside potential if sponsors First Solar and SunPower (NASDAQ: SPWR) decide to sell the yieldco in coming months, which they're considering. Given that this is one of the higher-yielding yieldcos on the market, it could get a premium in a sale, which is all upside from the already impressive dividend yield investors can count on.
A yieldco for windier times
Pattern Energy Group is a yieldco like 8point3 Energy Partners, but it owns wind projects in the U.S. and Canada. The stock yields 7.1% as I'm writing, and has been one of the higher-yielding yieldcos on the market.
Pattern also recently announced an expanded agreement with Pattern Development, which has a 10 GW pipeline of projects and $1 billion in long-term funding. Keeping a strong pipeline of projects is key for yieldcos, because they want to issue new debt and equity to buy projects that will have cash flows accretive to the business, allowing for dividend growth long-term. So, this is a yield that may rise over time.
Not only does Pattern Energy Group provide a high-yielding dividend today, but it could also be a growth dividend long-term if the company is able to buy more wind projects.
The only big oil company I would buy
I don't think big oil companies are well positioned for a world of cheap shale and rapidly improving electric vehicles. It's hard enough to make money in oil today; if demand is going to fall in the future, the business could be in real trouble.
The one exception is Total, the French oil giant that is taking the most aggressive path to a renewable-energy future. Total owns two-thirds of solar manufacturer SunPower, bought battery maker Saft for $1.1 billion last year, and is now investing in renewable-energy power plants. Instead of doubling down on oil and natural gas, Total is building the technology foundation to build and own solar-plus-storage solutions over the long term.
I think we'll slowly see Total transition its fossil-fuel business to a renewable-energy-based business. And that bodes well for the future of the company's 5.4% dividend yield. While others are chasing uncertain returns in oil fields, Total will own more and more renewable-energy assets with long-term contracts to sell energy to utilities for a set price. And the oil business will fund the transition to these new forms of energy.
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Travis Hoium owns shares of 8point3 Energy Partners, Pattern Energy Group, and SunPower. Travis Hoium owns shares of, and The Motley Fool recommends, First Solar and Total. The Motley Fool has a disclosure policy.