The best passive income-generating opportunities provide two things. They have an attractive current income yield and a payment that should steadily rise over time. That powerful one-two combination would enable investors to reach their income goals sooner.
Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A) boasts both characteristics. The renewable energy producer currently pays a dividend that yields 3.7%, more than double the passive income produced by an S&P 500 index fund. Meanwhile, the company expects to grow its dividend payment toward the upper end of its 5%-to-8% annual target range through 2026. It's becoming a powerful way to collect passive income.
Cashing in on clean energy
Clearway Energy owns a large-scale portfolio of wind energy, solar, and natural gas power plants. The company sells the power these facilities produce to utilities and large corporate buyers under long-term, fixed-rate power purchase agreements.
This business model provides the company with stable cash flow to support its high-yielding dividend. Clearway Energy has generated $174 million in cash available for distribution (CAFD) to investors during the first half of 2022. That's an increase of 23.4% from the same period of last year. The company has acquired several income-producing wind and solar energy projects over the past year, helping power its growth.
That solid showing in the first half of 2022 has Clearway Energy on track to achieve its full-year guidance forecast. The clean energy company expects to generate $365 million of CAFD this year.
Powerful growth ahead
Clearway Energy has made several moves this year, positioning it to grow its CAFD in the future. The company closed the sale of its thermal assets in May, generating $1.46 billion of net proceeds. The company has already identified investment opportunities for $750 million of those funds.
It most recently agreed to acquire a portfolio of wind energy assets from Capistrano Wind Partners. Clearway expects its total equity commitment to be in the range of $110 million to $130 million. That investment will generate an estimated $12 million to $14 million of annual CAFD starting next year.
Combined with other recent investments, that deal will bring Clearway Energy's proforma CAFD up to $400 million, or $1.98 per share each year. With its current dividend outlay at $1.442 per share annually following a recent 2% increase, the company has plenty of room to continue growing its dividend.
Meanwhile, the company has a lot of visibility into future growth as it puts the remaining cash proceeds to work. Clearway is currently working on a $300 million drop-down deal with its sponsor, Clearway Energy Group (CEG), to acquire renewable energy projects it has under development. That transaction would add an incremental $26 million to its CAFD, pushing it to around $425 million, or $2.10 per share.
That would leave the company with about $330 million of cash to acquire additional income-producing clean energy assets. If it can put that capital to work at a similar projected CAFD income yield as its next potential drop-down with CEG, it could add another $28 million of annual CAFD. That would push the total to more than $440 million, or $2.15 per share. With its current dividend outlay nearly 50% below that projected level, Clearway believes it can increase its payout by around 8% annually through 2026.
The company shouldn't have any problems finding opportunities to put that capital to work. CEG has an extensive renewable energy development pipeline, giving it ample opportunities for more drop-down transactions in the future. That's even more likely after energy giant TotalEnergies (NYSE: TTE) agreed to acquire a 50% interest in CEG. TotalEnergies also has an extensive pipeline of renewable energy assets that Clearway can now acquire in the future. On top of those internal acquisition opportunities, Clearway can continue pursuing third-party transactions, like the recent Capistrano deal.
A fast-rising income stream
Clearway Energy offers income investors the best of both worlds. It pays an attractive dividend that it expects to grow at a healthy rate for the next several years. It can therefore provide investors with a powerful passive income stream that could help them reach their financial goals faster than other options.
10 stocks we like better than Clearway Energy
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Clearway Energy wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 11, 2022
Matthew DiLallo has positions in Clearway Energy. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
