With the Federal Reserve on an interest rate-cutting trajectory, you may be looking for ways to earn income from stocks that pay dividends but that are considered relatively safe.
Enter yieldcos. Renewable energy developers spin out these companies to hold producing assets like wind and solar farms. The parent company tends to take a majority interest in the yieldco and sells a minority stake on the stock market.
This allows investors to put money into a renewable energy company without the development risk that comes with building infrastructure, which can be considerable given permitting issues, regulatory changes, supply chain constraints and other risks.
“Yieldcos are a good option for those looking to make income since they offer higher payouts,” says Dre Villeroy, CEO at investment firm Beyorch. “They are beneficial because they let shareholders partake in the energy industry without having to worry about the risks in the early stages of initiatives and projects.”
[Sign up for stock news with our Invested newsletter.]
Yieldcos buy assets from the developing company and other developers. These assets usually come with long-term contracts from companies that want to buy renewably generated electricity. That enables yieldcos to have a steady stream of cash flow that they then can pass on to investors in the form of dividends.
One of the problems with yieldcos when interest rates rise is that their costs for borrowing money to buy developed assets go up.
“Yieldcos are reactive to interest rates because they mostly depend on debt capitalization,” Villeroy says.
Also, because yieldcos are considered relatively safe investments, they compete with government debt, like Treasury notes. Government debt becomes more attractive as interest rates rise.
That means that a period of falling interest rates, like we’re in now, is good for yieldcos.
Another risk for these vehicles, regardless of interest rates, is that they will overpay for energy generation assets. Because yieldcos grow by buying developed assets, they can be under pressure to do so, which increases the risk of paying too much of an acquisition premium.
In addition to the risks, there can be plenty of reward with yieldcos, including relatively high dividends that can grow over time, lower volatility than other types of stocks, tax efficiency and diversification with low correlation to fixed income, traditional equities, master limited partnerships or real estate investment trusts.
Many investors are familiar with master limited partnerships, or MLPs, and real estate investment trusts, or REITs, and yieldcos are similar. Those investments also include cash-producing assets like oil and natural gas pipelines, or rent-generating property, and pass much of the proceeds onto investors.
For investors who want a publicly traded vehicle similar to an MLP but who want to avoid the oil and gas industry, yieldcos can offer a more environmentally friendly option.
With that in mind, let’s take a look at four yieldcos:
| Stock | Forward dividend yield |
| Clearway Energy Inc. (ticker: CWEN) | 6.0% |
| Atlantica Sustainable Infrastructure PLC (AY) | 8.1% |
| NextEra Energy Partners LP (NEP) | 18.3% |
| Brookfield Renewable Partners LP (BEP) | 5.5% |
Clearway Energy Inc. (CWEN)
This week, Jefferies boosted its price target for this yieldco to $36 from $34 and maintained a “buy” rating on the stock after the company’s recent financial performance and release of long-term guidance.
The company said it is anticipating approximately 7.5% to 12% annual growth in cash available for distribution from the midpoint of its 2025 financial guidance through 2027.
Clearway says it is one of the largest owners of clean energy generation assets in the U.S.
Its portfolio includes 11.4 gigawatts of gross capacity in 26 states, including 9 gigawatts of wind, solar and energy storage and more than 2.4 gigawatts of dispatchable power generation. Its emissions-free assets generate enough electricity to power more than 2 million homes, it says.
Geographic diversification is important for yieldcos, as it disperses weather-related risks, and Clearway Energy has assets across North America.
Clearway Energy has a forward dividend yield of 6%.
Atlantica Sustainable Infrastructure PLC (AY)
After merger and acquisition activity, the publicly traded yieldco space has shrunk. This company is in the process of selling itself to Energy Capital Partners and other investors, a transaction that will make the sector even smaller.
The deal, however, still has to get the approval of a court in London and regulatory go-ahead in the U.S. The transaction is expected to close this quarter or early in the first quarter of next year.
Atlantica has 2.2 gigawatts of operating renewable energy assets in addition to storage, natural gas, transmission infrastructure and water assets.
As of March, its assets had a weighted average remaining contract life of about 13 years, giving investors visibility into the company’s stable cash-flow potential.
Its development pipeline includes about 2 gigawatts of renewable energy and 5.6 gigawatt-hours of storage. Almost half of the projects are photovoltaic solar, with 41% being storage and 11% wind.
Atlantica has a forward dividend yield of 8.1%.
[SEE: 7 Clean Energy ETFs to Buy Now]
NextEra Energy Partners LP (NEP)
NextEra Energy Inc. (NEE) often makes lists of top renewable energy companies, so it’s no surprise that it also owns one of the top yieldcos, NextEra Energy Partners. Both stocks trade on the New York Stock Exchange.
NEP is a growth-focused limited partnership that acquires, manages and owns “contracted clean energy assets with stable, long-term cash flows,” according to its website. In an Oct. 23 statement accompanying the release of NEP’s third-quarter results, CEO John Ketchum announced the “repowering of another approximately 225 megawatts of wind facilities, bringing the partnership’s total backlog of wind repowerings to (about) 1.6 gigawatts through 2026.”
NEP and other yieldcos can fit into portfolios in a defensive capacity. They won’t likely outperform growth stocks when the market is doing well. But these companies also aren’t likely to decline as much as riskier investments during a market downturn. That’s because people and businesses need electricity regardless of economic conditions, and they are increasingly demanding that electricity be produced in a sustainable manner.
NEP has a forward dividend yield of 18.3% as of Oct. 31, but the stock is down about 30% year to date.
Brookfield Renewable Partners LP (BEP)
In addition to geographic diversification, diversity in generating sources can be advantageous for yieldcos, too.
Brookfield Renewable has both.
It operates renewable power and decarbonization solutions, with a portfolio of hydroelectric, wind, solar, storage facilities and sustainable solutions in North America, South America, Europe, the Middle East and Asia. It is also involved in carbon capture and storage, agricultural renewable natural gas and materials recycling.
The company’s renewable power portfolio includes more than 34,000 megawatts and includes investments in Westinghouse, a leading global nuclear services business.
Nuclear services are expected to become more important in coming years as governments around the world incentivize more nuclear plants to provide carbon-free baseload electricity amid the energy transition away from fossil fuels.
Brookfield Renewable has about 200,000 megawatts in its development pipeline.
Late last month, Brookfield Renewable said it was part of an acquisition team that plans to acquire minority stakes in offshore wind farms in the U.K. with a combined capacity of 3.5 gigawatts. Brookfield Renewable’s portion of the $2.3 billion deal is $570 million.
Brookfield Renewable has a forward dividend yield of 5.5%.
More from U.S. News
Cocoa Prices Are Soaring This Halloween. Here’s How to Invest
7 Best Water Stocks and ETFs to Buy
What Is a Yieldco? originally appeared on usnews.com
