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With Little Dividend Support, Investors Have Better Options Than TransAlta Corporation

With 64% of its cash flow being generated from gas, wind, and solar power under long-term contracts, TransAlta Corporation’s (TSX:TA)(NYSE:TAC) cash flow generation from coal is now down to approximately 30%.

And with coal generation being aggressively phased out, the requirement is for the current 6,200 megawatts of coal generation in Alberta to be eliminated by 2030.

So, the build-out of renewable energy power generation will require a sizable investment in the coming years, which will be subsidized by the government.

And with a 64% interest in TransAlta Renewables Inc. (TSX:RNW) as well as some of its own renewables facilities, TransAlta Corp. has exposure to the renewables segment of the power market.

But with the weakness we are seeing in Alberta power pricing, and TransAlta Corp.’s small dividend yield of just over 2%, I think we have a better opportunity in TransAlta Renewables.

TransAlta Renewables, with 18 wind facilities across Canada and the U.S., is Canada’s largest wind power generator.

With a dividend yield of 6.9%, TransAlta Renewables offers investors a high-yield opportunity that is supported by quality assets that are fully contracted with an average term of 15 years.

Going forward, the company will continue to see growth from more drop-down transactions from Transalta Corp. and from acquisitions. This should support further dividend growth as well an expansion of the company’s presence.

Northland Power Inc. (TSX:NPI) is another strong renewables energy provider. With a dividend yield of 4.51%, this independent power producer is dedicated to developing, building, owning, and operating facilities in Canada and internationally.

The company’s facilities produce electricity from clean-burning natural gas and renewable resources such as wind, hydro, solar, and biomass.

Northland’s management owns approximately 35% of shares outstanding, so its interests are aligned with shareholders.

And despite a third quarter that was just shy of expectations, Northland increased its dividend by 11% to $1.08 per share.

With 98% of revenues from long-term power contracts, the company’s next phase of growth will be in Taiwan. In its goal of phasing out nuclear energy, the Taiwanese government will be awarding 20-year offshore fixed-term contracts, and Northland Power is one of the companies vying for a piece of the action.

By 2018, the company estimates that 55% of EBITDA will come from offshore wind, 30% from gas and biomass, 10% from solar, and 5% from onshore wind.

So, in summary, at least in the short term, investors have better opportunities than TransAlta Corp. Higher-dividend-paying renewables utilities that are expected to see good growth going forward.

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Fool contributor Karen Thomas does owns shares of Northland Power Inc.

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