While dividend stocks provide investors an opportunity to create a passive-income stream, you need to analyze if this payout is sustainable across market cycles. For instance, several bank stocks in the U.S. suspended or reduced dividend payments during the financial crisis of 2008-09. Similarly, as oil prices fell off a cliff at the onset of COVID-19, TSX energy companies were forced to roll back dividends and offset mounting losses.
So, it’s essential to invest in dividend stocks that have a low payout ratio and expanding cash flows, allowing them to increase these payments over time.
One such top TSX stock is Brookfield Renewable (TSX: BEP.UN). Let’s see how this renewable energy giant can afford its tasty dividend yield of 5.1%.
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The bull case for Brookfield Renewable stock
Among the largest investors in renewable power, Brookfield Renewable has 24,000 megawatts of generating capacity. It operates across five continents and manages a diverse portfolio of hydro, wind, solar, and distributed energy solutions.
The company’s operating capabilities, scale, and global reach allow it to accelerate the global transition toward clean energy. Its business is underpinned by stable cash flows as the majority of the power generated is sold to public power authorities, utilities, and businesses. These long-term power-purchase agreements are backed by inflation-linked contracts resulting in stable cash flows.
Despite an inflationary environment, BEP increased funds from operations, or FFO, to US$312 million or US$0.91 per unit, which was 10% higher compared to the year-ago period. The company pays shareholders a quarterly dividend of US$0.3375 per share, indicating a payout ratio of less than 40%, providing BEP with enough flexibility to increase dividends, reinvest in capital projects, and target accretive acquisitions.
BEP’s renewable power development pipeline is 134,400 megawatts, with 5,000 megawatts expected to be commissioned in 2023 and 19,000 megawatts in the advanced stages of development. BEP has commissioned 1,500 megawatts this year, which includes battery storage projects, allowing it to improve realized power pricing and grid reliability.
The new capacity commissioned in 2023 should allow it to increase FFO by US$70 million annually, enabling further dividend hikes. Additionally, its advanced-stage pipeline should increase FFO by US$245 million once deployed.
BEP stock remains a top investment choice
Brookfield Renewable’s development is based on matching cash flows to costs and materially de-risk projects. So, it has successfully mitigated the impact of cost escalation in recent quarters, unlike other renewable power developers.
Armed with $4.5 billion in liquidity, BEP’s financial position is strong, providing it with enough flexibility to fund its growth. In the last 18 months, it has closed or agreed to invest US$4 billion and raised US$650 million via a bought deal and concurrent private placement.
Brookfield has historically focused on financing its growth by recycling assets and by raising debt or preferred equity. However, due to a positive shift in run-rate growth which is expected to continue, BEP issued equity capital to supplement these sources of funding.
Down 44% from all-time highs, BEP stock has returned 360% to shareholders in the past 10 years. It also trades at a discount of 40% to consensus price target estimates.
