Matt DiLallo, The Motley Fool
5 min read
In This Article:
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Brookfield Renewable pays a very sustainable dividend yielding over 5%.
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It has multiple drivers that could power more than 10% annual growth in its FFO per share through 2034.
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That combination of income and growth should add up to market crushing total returns over the next decade.
A high dividend yield often signals that a company's growth days are in the rearview mirror. In many cases, the high-yielding income stream makes up most, if not all, of the return the company delivers for investors.
Given the lackluster returns of many high-yielding dividend stocks, investors seeking market-crushing returns will probably overlook Brookfield Renewable (NYSE: BEPC)(NYSE: BEP) because of its more than 5% yield. However, that could prove to be a big mistake. I predict this leading renewable energy dividend stock will crush the S&P 500's returns over the next decade. Here's why.
A high-yielding dividend is sometimes a warning sign for investors. The company might have a weak financial profile or lackluster growth prospects. Neither of those is an issue for Brookfield Renewable. The opposite is true for this company.
For starters, the company backs its lucrative dividend with a top-notch financial profile. Brookfield Renewable sells about 90% of the renewable energy it produces under long-term, fixed-rate power purchase agreements (PPAs). Those PPAs have an average remaining term of 14 years while indexing about 70% of the company's revenue to inflation. That means Brookfield can bank on generating very predictable and steadily growing cash flow.
The company estimates that the inflation escalation clauses embedded within its existing PPAs will power 2% to 3% annual growth in its funds from operations (FFO) per share. Meanwhile, power rates have been growing faster than inflation in recent years. That trend seems likely to continue, given the expected surge in power demand driven by catalysts like AI data centers. Brookfield anticipates that margin enhancement activities such as securing higher market power rates as legacy PPAs expire will add another 2% to 4% to its FFO per share each year.
On top of generating very stable and steadily rising cash flow, Brookfield has a strong investment-grade balance sheet. It funds its business with long-term, fixed-rate debt and keeps ample liquidity on hand, to the tune of $4.5 billion at the end of the first quarter. Brookfield also routinely recycles capital, selling mature assets to fund higher-returning new investments, which enables it to maintain its financial flexibility.
