In the last few years, investors have found that some dividend stocks weren't as stable as they once seemed. Plunging energy prices forced once safe dividend stocks like Seadrill and Kinder Morgan to cut their dividends and Seadrill eventually went bankrupt. Even the once impenetrable General Electric had to slash its dividend in 2017.
There are solid dividends available to investors and some have extremely high yields. Some of my favorites are yieldcos, or companies who own renewable energy assets that have contracted cash flows years, sometimes decades, into the future. Pattern Energy (NASDAQ: PEGI), Brookfield Renewable Partners (NYSE: BEP), and 8point3 Energy Partners (NASDAQ: CAFD) are from different parts of the renewable industry sector but they all have top dividends that investors shouldn't ignore.
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Wind energy is one of the fastest growing energy sources in the U.S. and Pattern Energy owns wind turbines in the U.S., Canada, and Chile that provide consistent cash flows to investors. It currently has 19 wind farms in operation and one under construction with a total of 2,736 MW of generating capacity. The average power purchase agreement backing those projects is over 14 years with investment grade off-takers.
There should be significant growth ahead for Pattern Energy with a $1 billion new capital commitment for its development arm called Pattern Development 2.0. There's as much as 10 GW of potential pipeline for the company, which could keep the dividend growing for years.
Pattern Energy's 7.8% dividend yield is among the highest in the yieldco space and while that might be a deterrent to growth -- because yieldcos issue stock to buy projects and a high dividend raises the cost of capital -- the worst case scenario is that investors just collect a lofty dividend for more than a decade. The upside scenario is that Pattern Energy is able to grow its dividend, pushing the stock higher, making it easier to grow more in the future. Either way, investors have a top dividend stock on their hands.
Brookfield Renewable Partners
Hydrogen power plants are the main business for Brookfield Renewable Partners, who owns 10.6 GW of renewable energy assets. 85% of those assets are hydro with the remainder being wind projects.
What makes Brookfield Renewable Partners unique is that it doesn't pay out 85% or more of its cash available for distribution, as other yieldcos do, choosing to keep some cash on hand to fund growth. This organic growth makes the company less susceptible to the market's whims as companies who use stock to buy projects are.
Long-term, Brookfield Renewable Partners aims to grow its dividend 5% to 9% per year, driving 12% to 15% total returns for shareholders. With a 5.4% dividend yield today that dividend growth and the organic growth of the company make this one of the best dividends in energy.
8point3 Energy Partners
The only solar focused yieldco on the market is 8point3 Energy Partners, a yieldco formed by First Solar and SunPower. The company owns 946 MW of solar projects with an average power purchase agreement remaining of 19.4 years as of early October.
What makes solar energy unique in the renewable energy industry is its consistency year to year, resulting in consistent cash flows from solar projects. Unlike wind, solar intensity is easy to predict and that allows developers to price projects to generate the returns they need and there are few surprises for yieldco investors. Those cash flows are now what drives a 7.4% dividend yield for 8point3 Energy Partners.
The challenge for 8point3 Energy Partners is that its pipeline is drying up as First Solar and SunPower reduce their project development plans. That leaves little opportunity for dividend growth, but when you have a 7.4% dividend yield with nearly 20 years of contracted cash flows a stock doesn't have to have growth to be a value for investors.
Ride the winds of renewable energy
Given all of the challenges and disruption facing traditional fossil fuels, wind, solar, and hydro energy assets are a great option for dividend investors. And with over a decade of cash flows contracted and some opportunities for growth Pattern Energy, Brookfield Renewable Partners, and 8point3 Energy Partners are three top dividend stocks for 2018.
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