The world is in the middle of yet another power-source transition, this time from carbon-based fuels to cleaner alternatives. There have been similar major changes in history, and most took decades to complete. And while older fuel sources tend to remain important even as new ones rise, that doesn't change the growth opportunity presented by the shifts taking place. For income investors who want to step into the current transition, one stock in particular offers the chance to reap dividends that are well above the market's average yield and also benefit from the big growth opportunity that lies ahead.
The coming growth opportunity for clean energy
The world is increasingly worried about the impact that burning carbon fuels has on the environment. From pollution to global warming, there are very real reasons why solar, wind, and other clean alternatives are gaining favor. Companies focused on many of these power sources have already made significant strides in boosting the amount of energy produced using them, but there's still far more to come.
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For example, between 2020 and 2050, clean energy sources are expected to see 300% growth in the U.S. The big ones will be solar, wind, and battery storage. In the United States, the biggest growth is expected to occur in Western states, New York, and the Southeast. That's a fairly wide spread of locations, which means that numerous regulated utilities will be positioned to benefit.
NextEra Energy(NYSE: NEE), which operates a regulated utility in Florida and has a large and geographically diversified renewable power business as well, is probably the best option within the utility pack. It's a solid choice, with a 31-year streak of annual dividend increases behind it, a 3% yield at the current share price, and a 10% annualized dividend growth rate over the past decade. That said, NextEra Energy is most appropriate as a holding for dividend growth investors. Those seeking to maximize income could do better with Brookfield Renewable(NYSE: BEP)(NYSE: BEPC).
What does Brookfield Renewable do?
Brookfield Renewable is run by Brookfield Asset Management(NYSE: BAM), a large asset management company with a more than 100-year history of owning and operating infrastructure assets on a global scale. Brookfield Renewable is a source of permanent capital for Brookfield Asset Management, which means that you are investing alongside Brookfield Asset Management when you buy Brookfield Renewable. It is, essentially, run like an asset management business, buying and selling assets over time.
Brookfield Renewable's core focus, as its name suggests, is the renewable power sector. It has perhaps the most diversified clean energy portfolio you can find, with hydroelectric, solar, wind, storage, and nuclear in the mix. And its portfolio is spread across North America, South America, Europe, and Asia. It is as close to a one-stop shop as you are likely to find in the clean energy sector.
There are actually two ways to invest in it -- partnership class shares that currently offer a lofty 6.1% yield and corporate class shares that have a still-impressive yield of 5%. They represent the exact same entity and pay the same dollar value dividend per share -- the difference in yields is related to variance in the demand for each share class. Notably, many institutional investors are barred from owning shares of partnerships. Management has been steadily increasing the dividend over time, in line with its stated goal of hiking it between 5% and 9% each year.
For dividend growth investors, NextEra Energy's 10% dividend growth rate will clearly be appealing. But the mix of a higher yield and still-strong payout growth that is on offer from Brookfield Renewable will be more attractive to those who are looking to maximize income. And even some dividend growth investors might be willing to give up some dividend growth for the opportunity to collect an upfront yield that's twice as high as NextEra's if you buy the partnership share class of Brookfield Renewable.
There's a big opportunity for growth with Brookfield Renewable
Energy transitions happen over decades, not days. So the opportunity ahead of Brookfield Renewable presents a long runway for growth. Factor in its lofty dividend yield and you can clearly see why many investors will want to give serious consideration to adding it to their portfolios. If you do, you might find that one of the share classes of Brookfield Renewable ends up among your long-term income holdings.
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Reuben Gregg Brewer has positions in Brookfield Renewable Partners. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
