Many dividend traders concentrate on a inventory’s yield. Nonetheless, the info factors to an much more vital issue: An organization’s potential to extend its payout. During the last 50 years, dividend growers have vastly outperformed corporations with no change of their dividend coverage (10.7% annualized complete return vs. 7.1%), in response to a research by Ned Davis Analysis and Hartford Funds. 

Many corporations pay engaging and rising dividends. Nonetheless, one stands out for its mixture of getting an above-average dividend yield and superior dividend progress prospects: NextEra Power Companions (NEP 0.04%). Dividend traders will need to take into account including it to their portfolios.

A compelling worth proposition

NextEra Power Companions stands out amongst dividend shares:

Picture supply: NextEra Power Companions Investor Relations Presentation.

As that slide exhibits, it is one in every of solely 186 corporations within the S&P 1000 with a market cap above $5 billion. That provides it an honest measurement. Bigger corporations can profit from scale benefits. Nonetheless, it is usually tougher for bigger corporations to develop quickly.

Of that group, NextEra Power Companions is one in every of 54 that gives a dividend yield above 2.25% (which is increased than the common of the broader market as measured by the S&P 500’s 1.67% dividend yield). Within the firm’s case, it presently yields 4.14%. Corporations with increased dividend yields often develop extra slowly. That is as a result of they usually pay out a bigger proportion of their money move by way of the dividend as an alternative of retaining these earnings to finance progress. 

That is why solely 14 of these higher-yielding shares have been in a position to ship dividend-per-share progress of larger than 50% during the last 5 years. In NextEra Power Companions’ case, it has almost doubled its dividend during the last 5 years, rising it by an eye-popping 94.4%:

NEP Dividend Chart

NEP Dividend information by YCharts

In the meantime, solely three of the remaining corporations anticipate to ship greater than 12% compound annual dividend per share progress within the 2021 to 2024 timeframe. Nonetheless, solely NextEra Power Companions expects to realize larger than 12% dividend progress by way of 2025 (it is targetting 12% to fifteen% compound annual dividend progress throughout that interval).

This mix of dividend progress and yield may give NextEra Power the facility to supply 16% to twenty% annualized complete returns over the following few years. That might proceed its market-beating methods. It has delivered an almost 18% annualized complete return during the last 5 years. 

What’s powering NextEra Power Companions’ dividend?

NextEra Power Companions’ dividend sits on a strong basis. The corporate owns a large-scale portfolio of fresh vitality infrastructure, together with wind farms, photo voltaic producing amenities, and pure fuel pipelines. These property produce steady money move backed by long-term contracts with utilities and different finish customers. That provides the corporate with predictable and regular money move to help its dividend.

The corporate pays out about 80% of its earnings by way of dividends. That provides it a pleasant cushion whereas permitting it to retain some money to finance its growth. 

NextEra Power Companions has a number of different sources to assist fund progress. One notable possibility it has used a number of occasions lately is convertible fairness portfolio financing. It arranges this financing construction with an institutional investor like a pension or personal fairness fund. It pays them a low fastened charge on funding backed by a portfolio of income-producing infrastructure. NextEra Power Companions has the best to purchase out this financing at a hard and fast return with both money or inventory. It permits NextEra Power Companions to acquire fairness funding whereas limiting the dilution to present shareholders.

The opposite massive issue driving the corporate’s quickly rising dividend is its strategic relationship with main utility NextEra Power (NEE 1.64%). Its dad or mum routinely drops down cash-flowing infrastructure property to its affiliate. These transactions provide the utility with money to fund new investments whereas rising its partnership’s money flows to help its dividend progress plan. For instance, in November, NextEra dropped down a 49% curiosity in a 1.5-gigawatt renewable vitality portfolio and a 100% curiosity in a 345-megawatt portfolio of working wind property to the partnership. It funded this transaction by securing a 10-year convertible fairness portfolio financing association with Ontario Lecturers’ Pension Plan Board for $805 million backed by these and different property. 

NextEra Power has an unlimited portfolio of fresh vitality infrastructure property in operations and extra below development, offering plenty of visibility into NextEra Power Companions’ progress. As well as, the corporate could make third-party acquisitions and full natural expansions to drive dividend progress.

A high-powered dividend inventory

NextEra Power Companions stands out for its mixture of yield and dividend progress for a corporation of its measurement. It could actually make an excellent addition to income-seeking traders’ portfolios because it may provide them with a quickly rising payout backed by high-quality clear vitality property. It may additionally supercharge their returns, given its potential to supply market-crushing complete returns.

Matthew DiLallo has positions in NextEra Power and NextEra Power Companions. The Motley Idiot has positions in and recommends NextEra Power. The Motley Idiot has a disclosure coverage.

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