Better Dividend Buy: Brookfield Renewable Partners Stock or Algonquin?

As a larger player with quality and diverse assets, top-notch management, and persistent dividend growth, BEP is an indisputable buy.

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As the world is transitioning to renewable energy, renewable utilities are one of the best places to invest in for the next decades, especially for those stocks that offer dividend income. It means you get paid to wait for price appreciation. Between Brookfield Renewable Partners (TSX:BEP.UN) and Algonquin Power & Utilities (TSX:AQN), which is a better dividend buy?

First, here’s a quick overview of their businesses.

The businesses

Brookfield Renewable is one of the largest operators of renewable power and decarbonization solutions that’s available to regular investors. It is diversified geographically and in terms of technology. Its portfolio consists of hydroelectric, wind, solar, distributed energy and sustainable solutions across five continents.

Algonquin has two business segments: rate-regulated utilities (electricity — about 72% of this segment’s revenue, natural gas, and water generation) and non-regulated renewable energy (wind — about 75% of its generating capacity, solar, hydro, and thermal). It serves more than 1.2 million customer connections in Canada and the United States.

Dividends

At writing, Brookfield Renewable offers a cash-distribution yield of just over 4.2%. It has increased its cash distribution for 13 consecutive years. And it targets sustainable cash-distribution growth of 5-9% per year. For reference, its 10-year dividend-growth rate was 5.7%, while its most recent hike was 5.5% in February.

In a higher interest rate environment, Algonquin had to reposition itself, including selling about US$1 billion assets for capital recycling or improving the balance sheet. The utility stock also cut its dividend by 40% earlier this year.

The market repriced the stock accordingly. At writing, it offers a dividend yield of 5.1%. Its dividend should be more sustainable now, as it has a lower payout ratio. For example, its first-quarter payout ratio was 64% of adjusted earnings per share versus 81% a year ago. In the future, it may be able to increase its dividend again in alignment with earnings growth.

Growth

Brookfield Renewable has a track record of execution via value investing, careful capital allocation, and operational expertise that target to deliver total returns of 12-15% and lead to 5-9% cash-distribution growth per year. Its operational capacity is at about 25 gigawatts right now. And it has in the pipeline to quadruple its portfolio for decades of growth.

Currently, Algonquin has seven solar projects in the works that total generating capacity of 452 megawatts (MW). As well, it has two wind projects with an aggregate generating capacity of 196 MW. This year, the utility expects to invest about US$1 billion (70% allocated to its regulated segment and 30% to non-regulated renewables). It’s good to know that the company doesn’t plan to dilute shareholders in the near term, as it does not need to issue new common stock through 2024 to fund these investments.

Investor takeaway

Brookfield Renewable has an investment-grade S&P credit rating of BBB+ versus Algonquin’s rating of BBB. BEP is a top renewable energy stock to own. We like BEP for its better financial position, greater diversification, and more persistent growth.

Of course, investors also have better confidence for BEP’s cash distribution, which should continue growing north of 5% every year in the foreseeable future. Therefore, we would recommend BEP as a better dividend buy for long-term investing, especially on meaningful dips.

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 has positions in Brookfield Renewable Partners. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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