The world is slowly pivoting toward a carbon-free energy supply system by replacing fossil fuels with renewables. While we've come a long way in recent years, we're just scratching the surface. According to one estimate, the U.S. alone needs to spend $4.7 trillion to eliminate fossil fuels from the power sector. That number balloons to more than $10 trillion when adding in other developed countries. Given the sheer size of the investment needed, it will take decades to transition to a carbon-free world.
The massive size of the renewable market opportunity suggests that companies focused on the sector should be able to grow their operations and earnings for decades to come. That makes them great stocks to buy and hold. Two of the top opportunities in this industry are Brookfield Renewable Partners (NYSE: BEP) and TerraForm Power (NASDAQ: TERP).
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A steadily growing cash flow stream
Brookfield Renewable Partners is one of the largest renewable power generators in the world. The company owns stakes in 880 power-generating facilities that have the capacity to produce 17,400 megawatts (MW) of clean energy. While it has a diversified portfolio consisting of hydroelectric, wind, solar, and energy storage assets, hydro is its largest contributor at 75% of the total.
Because power prices can be volatile, Brookfield Renewable typically enters long-term, fixed-rate contracts with end users like utilities, which enables it to lock in power prices. Currently, it has agreements in place for 87% of the power it expects to produce this year, significantly increasing the visibility and stability of its cash flow.
Brookfield Renewable uses most of that money (with a target of 70%) to pay a dividend, which currently yields 5.4%. It invests the rest in building new renewable energy assets. The company plans to construct at least 1,000 MW of new power projects through 2022, which should grow its cash flow per share at a 3% to 5% annual rate. Meanwhile, it sees a combination of cost reduction initiatives and rising power prices boosting cash flow by another 3% to 6% annually. That growth rate supports the company's view that it can increase its already above-average dividend at a 5% to 9% yearly pace over that time frame. The company should be able to sustain that growth rate for decades to come given the massive growth potential of the renewable power market.
A bright future
TerraForm Power focuses on operating wind and solar power-generating assets in North America and Western Europe. The company currently has 3,737 MW of capacity, split 64% wind and 36% solar. It also sells most of its power under fixed-price agreements, with 95% of 2019's anticipated output under contract. That supplies it with stable revenue.
It also uses most of its cash flow (with a target of 80% to 85%) to pay its dividend, which currently yields 5.4%. TerraForm uses the funds it retains to invest in expansion projects and acquisitions.
TerraForm currently anticipates that it has enough embedded growth within its existing portfolio to support 5% to 8% annual dividend increases through 2022. Supporting that forecast is a combination of cost reduction initiatives, higher power prices, and growth-focused investments. With such a large investment opportunity for renewables in the company's core markets, it should be able to continue growing cash flow, as well as the dividend, at a healthy pace for many years to come by acquiring or constructing additional wind and solar projects.
Companies that consistently grow their dividends have historically outperformed the market. That factor alone makes these two high-yielding dividend growth stocks excellent options for the long haul. When we add in their focus on the massive renewable energy market, they appear to be safe bets to buy and hold for decades to come.
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