There has never been a better time to invest in dividend stocks. These companies demonstrate less volatility while delivering reliable cash income through thick and thin.
But there’s more to Brookfield stock than just income. This company is profiting from one of the biggest growth markets in human history: the transition to renewable energy.
Over the last five years, $1.5 trillion has been invested globally in renewable energy infrastructure. Bloomberg estimates that the investment rate will grow rapidly, totaling $5 trillion over the next five years.
This opportunity should persist for decades, but it’s not necessarily due to regulations or environmental concerns. Instead, it’s cold hard economics. As a dividend stock, Brookfield is making sure its shareholders directly benefit.
Here’s the deal
Since 1999, Brookfield Renewable has delivered 16% annual gains for shareholders. This rate of return trounces the market, and is largely atypical of dividend stocks. How has the company grown so quickly while also paying a rising dividend?
The biggest factor is being in the right place at the right time. Even after trillions of dollars in global investment, Brookfield’s management believes that the “growth of renewables will be larger than anyone expects.” It’s simply a matter of dollars and cents.
Electricity comes from power plants. These facilities have an expected lifespan. Coal plants, for example, can operate for 50 years until needing to be decommissioned.
Every year, the world adds new power plants to satisfy increasing demand, but mostly to replace end-of-life infrastructure, known as the replacement cycle. It’s the secret weapon behind this dividend stock.
Why kind of electricity replaces the old projects? It’s almost always a question of economics. Whichever is cheapest to build will take over the market share. Today, wind and solar are the most economic sources of bulk power on a global basis — and that doesn’t include any government incentives or subsidies.
The replacement cycle will take decades to play out, and whoever builds the new infrastructure will profit.
A better dividend stock
Brookfield operates a simple and repeatable strategy. It focuses on buying early-stage and distressed renewable energy assets, assuming extra risk for a disproportionate share of the reward.
For example, Brookfield recently purchased $1.2 billion of wind assets in Spain, which is temporarily out of favour due to regulatory uncertainty. Yet these projects already have 100% contracted cash flows. Brookfield secured a bargain price with very limited downside.
Here’s another example. Due to the termination of subsidies, Brookfield purchased a global solar developer for $500 million despite a 4,800 megawatt pipeline of projects that will pay for the acquisition many times over.
When most of the early rewards have been realized, Brookfield sells the mature asset, typically at a steep premium. This capital recycling program is what fuels the company’s reputation as a dividend stock.
As long as renewable energy projects continue to scale, Brookfield will find ways to profit. Fortunately, all data points suggest that this opportunity will last for decades to come.