Renewable energy stocks had a banner 2020 as momentum behind ESG investing and supportive policy actions pushed the group to new highs. But these stocks do not lend themselves to every type of portfolio. They don't typically return cash to investors, and their valuations depend heavily on projected future cash flows — sometimes many years down the line.
For investors looking for a potentially less risky way to capitalize on the renewable energy theme, companies known as yieldcos may fit the bill. At the simplest, a yieldco is an independent power producer that owns and operates up-and-running low carbon energy assets. Unlike other companies in the renewable energy ecosystem, yieldcos return a large portion of their cash to investors in the form of dividends.
The model grew out of the desire to separate development risk from operational power assets, while also providing a valuation uplift due to the steady yield and long-term nature of the assets.
Within the space two names stand out: NextEra Energy Partners and Atlantica Sustainable Infrastructure. Both companies are focused on dividend expansion, which is supported by attractive assets, long-term contracts and runway for more acquisitions. In the case of NextEra Energy Partners, the company is backstopped by the largest renewable developer in the U.S.