Clearway Energy Inc: This 8.8% Yield is Only Going Higher
CWEN Stock Is a Top Dividend Growth Stock
For the most part, dividend investors have to trade current yield for future payout growth. That is, if you want to own a company that’s set to pay you increasing dividends down the road, don’t expect to also lock in a handsome yield today.
And this shouldn’t really come as a surprise. Every income investor wants to collect bigger dividend checks over time. That’s why most of the well-known dividend growth stocks, such as the “Dividend Aristocrats“, have already gotten expensive and aren’t really known for paying high yields.
That’s also why, more and more often, investors looking for oversized payouts today have to settle for companies that don’t really have the best growth prospects.
And that, my dear reader, is why Clearway Energy Inc (NYSE:CWEN) is special.
Headquartered in Princeton, New Jersey, Clearway Energy invests in energy infrastructure assets. The company’s portfolio consists of over 7,000 megawatts of wind, solar, and natural gas-fired power generation facilities and district energy systems.
Now, you may be aware that the renewable energy business is not known to be the safest. So why should conservative dividend growth investors consider it?
Well, the answer is very simple: while building renewable energy assets can be quite risky, operating them is much less so. And, as it turns out, Clearway Energy is not constructing any wind or solar farms. Instead, the company does its business through long-term power purchasing agreements (PPAs).
In other words, the company doesn’t have to go out and find buyers. Its power generation assets already have a solid contract profile, with a weighted average remaining contract length of around 15 years. (Source: “Clearway Energy, Inc. Investor Presentation Septmber 2018,” Clearway Energy Inc, last accessed January 22, 2019.)
Clearway Energy Inc Has a Generous Dividend Policy
Thanks to a stable business model, Clearway Energy can return cash to investors on a regular basis.
Paying quarterly dividends of $0.33 per share, CWEN stock offers an annual yield of 8.8%.
As I mentioned earlier, high-yield stocks are not exactly known for providing the best dividend growth. If a company offers both a high current payout and strong growth prospects, investors would rush toward it and bid up its price. And before you know it, the rising stock price would cause its dividend yield to drop.
And yet, if an investor purchases Clearway Energy stock today, locking in an outsized yield of 8.8%, I’m pretty sure they’ll get an even higher yield on cost a few quarters down the road.
You see, despite not being a well-known name for dividend growth investors, Clearway Energy has done a pretty good job at increasing its cash payments to shareholders.
When the company completed its initial public offering in 2013 (back when it was called NRG Yield Inc), it had a quarterly dividend rate of $0.15 per share (split adjusted). Its first payment of $0.115 per share made in December 2013 was a prorated distribution corresponding to that initial quarterly dividend rate.
Since then, management has raised the payout every single quarter—by a total of 121% from the initial rate. That’s quite an impressive track record. (Source: “Dividends and Splits,” Clearway Energy Inc, last accessed January 22, 2019.)
In this day and age, most dividend-paying companies would be proud if they could increase their dividends on a yearly basis. And yet Clearway Energy managed to mail out bigger dividend checks to investors every three months.
In the world of dividend growth investing, things don’t get much better than this.
The Best Could Be Yet to Come
Of course, we know that past performance does not guarantee future results. Nevertheless, in its latest earnings release, Clearway’s management made it clear that they are targeting dividend-per-share growth of five to eight percent in 2019. (Source: “Clearway Energy, Inc. Reports Third Quarter 2018 Financial Results and Initiates 2019 Financial Guidance,” Clearway Energy Inc, November 6, 2018.)
And there are good reasons to believe that Clearway Energy can achieve that target.
In particular, the company has been generating an increasing amount of cash from its operations. In the first nine months of 2018, Clearway Energy generated $250.0 million in cash available for distribution, which represented a 19.6% increase year-over-year.
For 2019, Clearway Energy’s cash available for distribution is guided at $295.0 million. This would represent another 3.5% improvement from the $285.0 million that the company expects to have earned in full-year 2018.
Meanwhile, Clearway Energy has quite a few expansion opportunities that could boost its financial performance. The company is executing on its right of first offer to acquire additional interest in a 290-megawatt utility scale solar project in Dateland, Arizona. The project has a remaining PPA term of 20 years. (Source: “Third Quarter 2018 Results Presentation,” Clearway Energy Inc, November 6, 2018.)
Moreover, Clearway Energy has signed an energy services agreement with Mylan LLC, an investment grade counterparty. Under the agreement, Clearway Energy will supply chilled water, hot water, and electricity through a combined heat and power facility to be constructed at Mylan’s Caguas, Puerto Rico facility.
Commercial operations are expected to start in the second quarter of 2019. Once operational, the project could bring another $1.3 million in cash available for distribution to Clearway Energy on an annual basis.
Add it all up and you’ll see that the company is well positioned to continue its dividend increase track record. And with a current yield of 8.8%, CWEN stock could be one of the best dividend growth opportunities in 2019.