The energy industry hasn't been kind to dividend investors over the years. Energy-price volatility has plagued the sector, forcing many energy companies to reduce or suspend their dividends. Given the sector's accelerating transition toward cleaner alternatives, many more could face that same fate in the coming years.
The sector's issues make Brookfield Renewable (BEPC 2.38%) (BEP 3.81%) stand out. It has an excellent dividend track record and an even brighter future. These are just some of the factors that make it one of the few must-own stocks in the energy industry for dividend investors.
A sustainable payout
Brookfield Renewable currently offers investors a 3.1% dividend yield. That's more than double the S&P 500's 1.4% yield. Brookfield has gone to great lengths to ensure the long-term sustainability of its payout.
It built its foundation around a low-risk business model focused on generating stable cash flow. Brookfield owns a globally diversified renewable energy portfolio consisting of hydroelectric, wind energy, and solar power-generating facilities.
It sells the electricity produced to end users like electric utilities under long-term fixed-rate power-purchase agreements. That enables it to generate stable cash flow to support its dividend. Brookfield pays out a large portion of its cash flow via dividends, retaining the rest to help finance its expansion.
Another foundational aspect of Brookfield Renewable's strategy is having a strong financial profile. The company has a solid investment-grade credit rating and lots of liquidity. That gives it the financial flexibility to invest in expanding its portfolio. The company has a long history of making value-accretive acquisitions and completing high-return development projects.
The company's combination of steady cash flow, a reasonable dividend payout ratio, and a strong financial profile puts its current dividend on one of the more sustainable foundations in the energy sector.
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A powerful growth plan
Brookfield Renewable's rock-solid current dividend is only part of its draw. The company also has enormous long-term upside, powered by its focus on the renewable energy megatrend.
The company has several organic growth drivers, including inflation-linked contractual rate increases, rising renewable power prices, cost-saving initiatives, and its development pipeline. It has significantly expanded its renewable energy development project pipeline in recent years to enhance its growth prospects. These catalysts should combine to power 6% to 11% cash flow per-share growth through at least 2026.
In addition to that, the company can continue making value-enhancing acquisitions. Brookfield estimates that future merger-and-acquisition activities could add up to 9% to its bottom line each year. Deals could include acquiring operating renewable power assets, development projects, and companies that need to decarbonize their operations. Combined with its organic growth drivers, Brookfield could deliver up to 20% annual growth in the coming years.
This forecast easily supports Brookfield's plan to grow its dividend at a 5% to 9% annual pace. That would continue the company's trend of steady dividend growth.
Brookfield has raised its payout at a 6% compound annual rate since 2001, recently delivering its 11th-consecutive yearly increase. It's also worth noting that, as Brookfield's earnings grow faster than the dividend in the future, its dividend payout ratio will decline, putting the payout on an even firmer long-term foundation.
Best in breed
Brookfield Renewable offers dividend investors an above-average yield backed by a low-risk business model and rock-solid financials. Meanwhile, it has plenty of power to continue growing its payout in the future, given its focus on renewable energy. These factors make Brookfield Renewable stand out as one of the few must-own dividend stocks in the energy industry.
