3 Reasons This Little Known High-Yield Dividend Stock Should be in Your Portfolio

Source: Getty Images

Renewable energy is likely to become a major trend in the future of the world's energy mix. Given this tantalizing growth catalyst many dividend investors are looking to yieldCos, which serve as renewable energy utilities, for high-yields and strong income growth. 

Yet as you can see, investing in yieldCos isn't necessarily for the faint of heart. 

NEP Total Return Price data by YCharts

Over the past year  NextEra Energy Partners (NYSE: NEP), 8Point3 Energy Partners (NASDAQ: CAFD), NRG Yield (NYSE: NYLD), TerraForm Power (NASDAQ: TERP), and TerraForm Global (NASDAQ: GLBL), have all under performed both the Dow Jones Utilities Index (IDU), and the market as a whole. 

Yet this short-term crash also creates a great long-term investing opportunity for those willing to look past the recent industry turmoil and buy shares in the highest quality yieldCos. Let's look at three reasons in particular why NextEra Energy Partners deserves to be in your diversified dividend portfolio.

Blowout earnings report shows strong management execution

Source: Q1 2015, 2016 earnings reports

NextEra Energy Partners' stupendous growth was due to the acquisition of 300 MW of additional wind farms from its sponsor and general partner, NextEra Energy Inc.(NYSE: NEE) These forms of acquisitions, (known as "drop downs") is the key to understanding the growth potential of a yieldCo. 

For instance, since its 2014 IPO NextEra Energy Partners has more than doubled the size of its energy generating assets. Because NextEra Energy Inc. happens to be America's largest supplier of wind and solar power, the potential drop down pipeline for NextEra Energy Partners could be as high as 5,400 MW of new solar and wind production; and that's just in 2017 and 2018.

With such a strong growth catalyst available, its little surprise that NextEra Energy Partners is confident that it can continue growing its payout at a fast pace for the foreseeable future. However, as wonderful as distribution growth might be, there are additional important factors income investors need to consider.

The strongest payout profile among its peers

Sources: Yahoo Finance, earnings reports, investor presentations, Fastgraphs

As you can see, NextEra Energy Partners trading at a premium to its peers. That is a likely a result of Wall Street having strong confidence in the long-term sustainability of the current payout, as well as its long-term growth prospects. 

One of the strongest reasons for this is the conservative nature of NextEra Energy's management, especially compared to the TerraForm yieldCos. Their sponsor, SunEdison, recently filed for bankruptcy because of the mountain of debt it acquired by trying to grow too quickly. Along the way it tried to offload much of that debt onto its yieldCos, as well as sell them its solar assets at elevated prices. 

Which brings me to the final reason that NextEra Energy Partners represents the highest quality yieldCo available today.

Conservative management is vital to long-term success
TerraForm Power and TerraForm Global show precisely why impatience is the enemy of long-term investing success. SunEdison was so eager to have its yieldCos grow their payouts because, as their general partner, it would then receive 50% of marginal cash flow above a certain level. 

In contrast NextEra Energy, 8Point3 Energy Partners, and NRG Yield all have management teams that are willing to take a more cautious approach to growth. Thus their respective balance sheets are much stronger. This greatly minimizes the chance of violating their debt covenants which would trigger a suspension of payouts to investors and send their share prices nose diving.

Risks to be aware of 
Even with their cash flows secured by fixed-fee contracts with financially sound utilities, often for 17-25 years, there are risks to investing in renewable energy yieldCos. For example, wind and solar power are variable, effected by season and weather. 

For instance, solar output is lower during the winter months, when days are shorter. Meanwhile NextEra Energy Partners reported a 25% difference in wind output, relative to expected amounts, between March 2015 and February 2016. This variability means that non-renewable cash flow sources, such as NextEra Partners' and NRG Yield's natural gas pipelines and gas fired power plants,respectively, can provide extra payout stability.

Finally, be aware that the yieldCo business model involves funding growth through debt and equity, which means that low share prices can hurt a yieldCo's growth potential if it persists long enough. Thus NextEra Energy Partners' premium might end up a competitive advantage over its rivals. 

Bottom Line
With the best distribution coverage ratio in its industry, the nation's largest supplier of renewable energy power as sponsor, and conservative, long-term focused management, NextEra Energy Partners could prove one of America's best dividend stocks over the next decade. 

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