These Quality Utilities With 6-7% Yields Are Strong Buys

In the past few months I’ve bought Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) and another entity, but they’re even more attractive today.

The Motley Fool

Quality utilities pay out juicy and growing yields because they generate stable cash flows. Investors buying these businesses can sit back and enjoy the stable and growing income for many years to come.

Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) and Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) are high-quality utilities. They pay out distributions in U.S. dollars and, using a foreign exchange of US$1 to CAD$1.42, they yield 7.1% and 6.3%, respectively. The stronger U.S. dollar and price pullbacks are factors of the high yields.

Brookfield Renewable Energy

Brookfield Renewable owns, operates, and develops renewable power generation assets in North and South America and Europe. The business has more than a century of experience in the power sector, and 81% of its portfolio is hydro-power assets with the remainder primarily in wind-power facilities.

Brookfield Renewable has roughly US$19 billion in assets and about 7,300 megawatts (MW) of installed capacity. This month, together with its institutional partners, the business intends to acquire 57.6% of Isagen S.A. from the Colombian government.

Isagen has a 3,000 MW of primarily hydroelectric-generating capacity and a 3,800 MW development portfolio in Colombia. The acquisition aligns well with the assets Brookfield Renewable already owns–assets that generate strong and stable cash flows.

Brookfield Renewable has increased distributions for six consecutive years and 90% of its cash flows are contracted. Further, it targets to grow distributions by 5-9% per year on average and to maintain a funds from operations (FFO) payout ratio of 60-70%. Stable cash flows and a sustainable payout ratio increases the safety of its 7.1% yield.

From January 1, 2000 to September 30, 2015, a $10,000 investment (with dividends reinvested) in Brookfield Renewable grew to over $100,000. In the same period, S&P/TSX returned over $20,000, and S&P 500 returned less than $20,000.

Brookfield Infrastructure

Brookfield Infrastructure owns and operates a diversified portfolio of high-quality infrastructure assets in Europe, Australia, and North and South America. The business owns utility assets that are diversified across six countries.

For its transportation business, Brookfield Infrastructure has large rail operations in Australia and South America, 11 toll roads in South America, and 30 ports in North America, the United Kingdom, and across Europe.

Brookfield Infrastructure’s energy business consists of energy transmission, distribution, and storage services. In France, the business has communications infrastructure, which are essential to the media broadcasting and telecom sectors.

Brookfield Infrastructure has increased distributions for eight consecutive years. Based on its third-quarter 2015 results, 90% of its cash flows are either regulated or contracted and 84% of its cash flows are generated from its utility and transport businesses. These attributes, in addition to its FFO payout ratio of about 67%, increase the safety of its 6.3% yield. Brookfield Infrastructure targets to grow distributions by 5-9% per year.

Over the one-, three-, and five-year periods that ended November 5, 2015, unitholders of Brookfield Infrastructure (with dividends reinvested) enjoyed average annual returns of 23% or higher.

Tax on distributions

The distributions paid out by Brookfield Renewable and Brookfield Infrastructure are like dividends, but they’re taxed differently. Their distributions can consist of return of capital, interests, and dividends.

Additionally, if their distributions consist of U.S. dividends, there will be a 15% withholding tax on that portion if the shares are held in a non-registered or TFSA account. Withheld taxes in a TFSA are not recoverable.

The constituents of distributions can change, so interested investors should use the “Tax Information” section of their websites as a reference only. Investors should check with a qualified financial advisor or tax professional to determine which account is best to buy Brookfield units.

Conclusion

The Brookfield businesses are priced at attractive valuations and have above-average yields of 6-7%. No matter if you’re a total returns, income, or value investor, I believe it is worth it to consider the Brookfield businesses today. I bought shares in these quality utilities at higher costs than they’re trading today, and I believe Brookfield Renewable, which is at about $33, and Brookfield Infrastructure, which is under $48, are strong buys.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning 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 richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Brookfield Infrastructure Partners and Brookfield Renewable Energy Partners LP.

More on Dividend Stocks

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »