NextEra Energy Partners(NYSE: NEP) currently offers an eye-popping dividend yield of more than 12%. That's several times higher than the S&P 500's 1.4% dividend yield. That much higher rate would enable investors to generate a lot more income for every dollar they invest in the renewable energy company.
However, since that high dividend yield comes with a higher risk profile, investors seeking to generate a generous passive income stream from the renewable energy sector should consider Brookfield Renewable(NYSE: BEPC)(NYSE: BEP) or Clearway Energy(NYSE: CWEN)(NYSE: CWEN.A) first. Their high-yielding payouts are on much more sustainable foundations right now.
A higher-risk income stock
NextEra Energy Partners' stock has lost roughly two-thirds of its value over the past three years. The primary factor has been surging interest rates. They've increased its cost of capital by making it a lot more expensive for the company to issue new debt or shares to refinance existing funding as it matures or finance new investments. While this headwind isn't unique to NextEra Energy Partners, it has hit the company harder because of its weaker financial foundation, including a junk credit rating.
That forced the company to make some notable strategy shifts. It's selling off its natural gas pipeline assets to repay funding vehicles as they mature. It also slowed its dividend growth rate from 12%-15% annually through 2026 to 5%-8% per year with a target of 6%. NextEra Energy Partners believes it can achieve its slower growth rate by investing in organic growth projects, primarily repowering older wind farms. That's a shift from its acquisition-driven growth strategy.
The company is making excellent progress on its plan. Furthermore, it's working on a longer-term funding solution. That's why I have been piling into the stock.
However, while I think it has significant upside, it's a much more risky income stock. It expects its dividend payout ratio to be in the mid-90s through 2026, which leaves it with little room for error. If the company doesn't execute its strategy perfectly, it might need to cut or suspend its dividend to get its financial profile on a more sustainable foundation.
A conservative income producer
Brookfield Renewable has a much more sustainable financial foundation. The leading global renewable energy producer has a strong investment-grade balance sheet with lots of liquidity. It also primarily uses long-term fixed-rate debt to fund its business, making it more immune to higher interest rates. It also has a lower dividend payout ratio -- 85% last year -- that's steadily improving.
The company's high-yielding dividend of over 6% should grow more sustainable in the coming years. Brookfield sees a quartet of drivers growing its funds from operations (FFO) by more than 10% per share through 2028. Meanwhile, the company expects to increase its dividend by 5% to 9% annually. It will probably be closer to the bottom end of the range, given its historical trend of 6% per year. As a result, its dividend payout ratio should continue falling.
Brookfield expects to deliver that strong FFO growth rate while maintaining its conservative financial profile. A key aspect of its strategy is capital recycling. It will sell mature assets and reinvest the proceeds into higher-returning new investments. For example, it raised $800 million of capital last year, providing the seeds for future growth.
High-end growth secured through 2026
Capital recycling is Clearway Energy's primary power source. The company cashed in on the value of its thermal assets in 2022. It has been steadily redeploying those proceeds into higher-returning renewable energy investments. It has already committed to deals or made offers to put all the proceeds to work in transactions that should close through the second half of next year.
That gives the company a clear line of sight to grow its dividend toward the upper end of its 5% to 8% annual target range through 2026. The $213 million of investments it made last year drive its view that it can increase its 7%-yielding dividend by 7% this year.
Meanwhile, Clearway is already laying the foundation to continue growing its dividend beyond 2026. It has secured higher rate contracts on some of its natural gas power plants, giving it visibility to deliver dividend growth toward the low end of its target range in 2027. Meanwhile, it has the financial flexibility to continue acquiring additional renewable energy projects in the future.
Safer alternatives
NextEra Energy Partners offers a monster yield and powerful total return potential. However, since it has a higher risk profile than Brookfield Renewable and Clearway, investors seeking a safer passive income stream powered by renewable energy should consider those stocks first. They should be able to continue growing their higher-yielding payouts while there's still a high risk that NextEra Energy Partners could cut its big-time dividend.
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Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, Clearway Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
