This energy stock is a must for any dividend investor

The energy industry has not been kind to dividend investors over the years. Energy price volatility has plagued the sector, forcing many energy companies to cut or suspend dividends. Given the sector’s accelerated transition to cleaner alternatives, many more could suffer the same fate in the years to come.

The challenges of the sector make Brookfield Power ( BEPC 0.40% )( BEP 0.20% ) come out. It has an excellent dividend record and an even brighter future. These are just some of the factors that make it one of the few must-have stocks in the energy sector for dividend investors.

Sustainable remuneration

Brookfield Renewable is currently offering investors a rate of 3.1% dividend yield. It’s more than double the S&P500yield of 1.4%. Brookfield has gone to great lengths to ensure the long-term viability of its payout.

It built its foundation around a low-risk business model focused on generating stable cash flow. Brookfield has a globally diversified portfolio renewable energy portfolio composed of hydroelectricity, wind energyand solar energy-production facilities.

It resells the electricity produced to end users such as electric utilities under long-term fixed rate power purchase agreements. This allows it to generate stable cash flow to support its dividend. Brookfield pays out much of its cash flow as dividends, keeping the rest to help fund its expansion.

Another fundamental aspect of Brookfield Renewable’s strategy is having a strong financial profile. The company has a strong investment grade credit rating and plenty of cash. This gives him the financial flexibility to invest in expanding his portfolio. The company has a long history of making value-added acquisitions and delivering high-yield development projects.

The company’s combination of stable cash flow, reasonable dividend payout ratio and strong financial profile places its current dividend on one of the most enduring foundations in the energy industry.

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A powerful growth plan

Brookfield Renewable’s current rock-solid dividend is only part of its draw. The company also has huge long-term upsides, fueled by its focus on the renewable energy megatrend.

The company has several organic growth drivers, including inflation-linked contractual rate increases, rising renewable energy prices, cost reduction initiatives and its development pipeline. It has significantly expanded its portfolio of renewable energy development projects in recent years to improve its growth prospects. These catalysts are expected to combine to fuel cash flow per share growth of 6% to 11% through at least 2026.

In addition, the company can continue to make value-creating acquisitions. Brookfield estimates that future M&A activity could add up to 9% to its bottom line each year. The agreements could include the acquisition of renewable energy operating assets, development projects and companies that need to decarbonize their operations. Combined with its organic growth engines, Brookfield could generate up to 20% annual growth in the years to come.

This forecast easily supports Brookfield’s plan to increase its dividend at an annual rate of 5% to 9%. This would continue the company’s trend of steady dividend growth.

Brookfield has increased its payout at a compound annual rate of 6% since 2001, recently achieving its 11th consecutive annual increase. It’s also worth noting that as Brookfield’s earnings grow faster than the dividend going forward, its dividend payout ratio will decline, putting the payout on an even stronger long-term footing.

Best of breed

Brookfield Renewable offers dividend investors an above-average yield backed by a low-risk business model and strong financials. In the meantime, he has plenty of power to keep increasing his payout in the future, given his focus on renewables. These factors make Brookfield Renewable one of the few must-have dividend stocks in the energy sector.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Warren Dockery

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