Investing in high-dividend stocks might seem enticing for Canadians looking to create a recurring stream of passive income. However, as dividend payouts are not guaranteed, looking beyond a company’s high yield is crucial to ensure these payments are maintained across business cycles.
Moreover, the dividend yield is inversely related to share prices. Basically, if the stock price declines, the yield moves higher and vice versa. So, investors also need to analyze whether the share price drawdown is company-specific or sector-specific.
Brookfield Renewable (TSX: BEP.UN) is a TSX dividend stock that trades 51% below all-time highs. However, the pullback has meant the clean energy giant pays shareholders a forward yield of almost 7%. So, let’s see if you should buy Brookfield Renewable stock at current prices.
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The bull case of investing in this TSX dividend stock
Brookfield Renewable is a global renewable energy and decarbonization platform operating across five continents. Its portfolio includes hydroelectric, wind, solar, and distributed energy assets, enough to offset 250 million tonnes of carbon annually.
Brookfield is positioned to capitalize on rising power demands from digitalization and net-zero transition. Moreover, its investment-grade balance sheet with diverse funding sources and contracted cash flows allows it to pay shareholders a tasty dividend yield. The company’s growth strategy targets 12-15% total returns and 5-9% annual distribution growth.
Brookfield Renewable stock went public in late 2000 and has since returned more than 400% to shareholders. However, if we adjust for dividend reinvestments, cumulative returns are closer to 2,900%. So, a $1,000 investment in the TSX dividend stock soon after its initial public offering would be worth close to $30,000 today.
In the third quarter (Q3) of 2024, Brookfield Renewable reported funds from operation (FFO) of US$278 million or US$0.42 per share, up 11% year over year. It deployed US$500 million of capital and commissioned 1,200 megawatts (MWs) of new capacity in the September quarter which should drive future FFO and dividends higher.
Notably, it generated US$2.3 billion from asset sales and secured contracts for 6,100 gigawatt (GW) hours of additional generation. The company emphasized it remains on track for 7,000 MWs of total capacity additions in 2024.
Is BEP stock undervalued?
Brookfield Renewable has increased its FFO per share at an annual rate of 12% since 2016. Moreover, its distributions per unit have increased by 6% between 2001 and 2024, showcasing the resiliency of its cash flows. The company has doubled its operating capacity to 37 GWs in the last four years, while its development capacity is much higher at 200 GW.
Brookfield Renewable explained that electricity demand is growing rapidly due to the proliferation of artificial intelligence. For instance, data centre power demand is forecast to grow from 2% of global consumption to 10% by 2030. Over the last few months, BEP has already inked deals with several data centre infrastructure companies, positing it to benefit from secular tailwinds.
Analysts tracking the clean energy stock expect its AFFO per share to increase from US$1.67 in 2024 to US$2 in 2026. Comparatively, it pays shareholders an annual dividend of US$1.42 per share, indicating a payout ratio of less than 75%.
Priced at 10 times forward AFFO, BEP stock is reasonably valued and trades at a discount of 45%, given consensus price target estimates. If we include its dividend payout, cumulative returns could be closer to 55% in the next 12 months.
