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2 Fast-Growing Dividend Stocks That Will Soar

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Co-produced by Austin Rogers

Duel of visions of the future of energy

Today, we live in the midst of an unprecedented level of uncertainty about the future of energy in the world. Two dual visions of the present future very different looks.

The Paris Climate Agreement calls for drastic cuts in carbon emissions around the world to prevent global average temperatures from rising more than 2 degrees Celsius. Advances in renewable energy technologies over the past few decades have dramatically reduced the costs of these energy sources, allowing countries to massively increase wind and solar installations.

But critics of the ‘net zero by 2050’ plan that would seek to limit global temperature rise to 2 degrees Celsius say it simply isn’t possible to achieve this with current technologies and supplies. of critical materials. Thus, the demand for oil, natural gas and probably also nuclear energy will continue to grow with the world’s population over the next few decades.

Representing the latter view, you have Exxon Mobil (XOM) the recent energy outlook, which predicts that by 2040, energy consumption will increase not only for renewable energy, but also for oil, natural gas and nuclear energy.

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Exxon Mobile Energy Outlook

Are Exxon Mobil’s energy prospects lucid and realistic? Or is he too optimistic in favor of the oil and gas giant’s own specialization?

While we believe demand for oil and gas will continue to grow for a long time to come, we believe Exxon Mobil’s forecast likely underestimates the efforts governments will be willing to make to decarbonize in the future.

At the other end of the spectrum, you have the McKinsey Global Institute’s World Energy Outlook 2022, which shows a very different trajectory for energy demand in the future.

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McKinsey’s Global Perspective on Energy

McKinsey’s forecast shows that global oil demand will peak in 2025, natural gas demand will peak in 2035 and coal demand will already peak in 2013, while Exxon Mobile’s forecast shows oil demand and gas will continue to grow until at least 2040.

Already, we are skeptical of McKinsey’s projection for several reasons.

  1. As we pointed out in “2 High Yielding Stocks for a Lifetime of Passive Income“, demand for coal has hit an all-time high this year as European countries scramble to secure energy sources to replace Russian gas.
  2. As Europe is now learning, it is dangerous for countries to become too dependent on an opposing nation for critical materials or energy-related intermediates. The Western world remains too dependent on China for the raw materials and photovoltaic solar panels needed to continue to increase the production of renewable energies.

So which vision of the future of energy will prove to be correct? Or will the truth end up somewhere in the middle?

Frankly, we don’t know. We don’t think anyone really knows. Exogenous shocks, such as the invasion of a large energy producer in a neighboring country, could always disrupt a well-thought-out projection.

Rather than picking sides, at High Yield Investor we believe that the future of energy will necessarily be an “all of the above” scenario, involving rapid growth in renewables but also natural gas, oil and can -be hydrogen.

Given this fundamental view, here are some of our top picks in energy and utilities.

1. Brookfield Renewable Partners LP (BEP, BEPC)

BEP is the industry leader in owning, managing and developing pure-play renewable power generation assets. One of the most exciting aspects of BEP is its massive growth ahead, exemplified by its approximately 100 gigawatt pipeline of future development projects, approximately four times larger than its currently operational portfolio.

BEP is technologically diverse, with just under half of its portfolio in hydroelectric dams, 23% in wind, and most of the rest in various forms of solar power.

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Presentation of the BEP

As you can see in the illustration above, BEP is also geographically diverse, with 80% of its assets located in North America or Europe, 17% in South America, and a small but growing 3% in Asia.

The overwhelming majority of BEP’s cash flow comes from long-term power purchase agreements (“PPAs”) with an average remaining term of 14 years. These contracts create a high degree of stability in BEP’s revenue streams, and more than 70% of them include inflation adjustments that provide incremental revenue increases from high inflation.

Another prime feature of BEP is the company’s strong balance sheet which has earned a BBB+ credit rating. Although BEP is highly leveraged as part of its funding strategy, it also maintains a large cash buffer at all times. Currently, the company enjoys approximately $4 billion in cash (~30% of market capitalization).

Recently, BEP reached an agreement with the uranium producer Cameco (CCJ) at purchase Westinghouse, a company that maintains and services nuclear power plants.

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Presentation of the BEP

It makes sense for BEP to enter the nuclear energy space with this acquisition, as it is highly complementary to the rest of its clean energy portfolio.

Many countries that were previously on the path to phasing out their use of nuclear energy have recently backtracked and opted to extend the life of these nuclear power plants and, in some cases, even expand the use nuclear. Germany, France and Belgium are all examples on the European continent, but the recently passed Inflation Reduction Act also contains incentives for nuclear power generation in the United States.

These and other investments are expected to fuel BEP’s continued strong growth in funds from operations (“FFO”) per unit, which has been around 10% per year for the past decade. And, in turn, this strong earnings growth should also fuel distribution growth, which has also been strong and consistent for more than two decades now.

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Presentation of the BEP

The combination of BEP’s 4.55% dividend yield and 6% dividend growth alone yields a total return of 1-10% or more. But also consider that the BEP likely has a significant price upside from here (at least 35%) when renewables become investor-friendly again.

ATCO is a Canadian holding company of various companies, the principal of which is Canadian Utilities (OTCPK: CDUAF) accounting for approximately 80% of revenues.

While CU is a slow growing regulated utility operating primarily in Alberta, Canada, ATCO also owns a handful of faster growing businesses. Notably, ATCO has long been an industry leader in the niche market of modular construction in Canada. This company builds and operates temporary workforce housing for various projects such as pipeline construction, usually located in remote areas.

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Presentation ATCO

ATCO also holds a minority stake in Neltume Ports, owner/operator of port facilities in South America.

Although ATCO’s total earnings were limited from 2013 to 2021, this year appears to have broken that streak of poor performance.

Total adjusted earnings increased approximately 13.5% year-over-year in the first half of 2022, and adjusted EPS increased 13.8% due to a slight decrease in shares outstanding. Meanwhile, in the second quarter of 2022, adjusted EPS jumped 15.7%, indicating that ATCO’s earnings resurgence this year may have just begun in the first half.

This impressive performance was largely driven by earnings growth at Canadian Utilities (up 18.2% in the second quarter), which could mean that CU’s long streak of underperformance has come to an end.

This comment from the management of the Q2 conference call:

Our leadership’s drive to deliver top performance, our operational expertise, and our historical track record all support the idea that outperformance above allowed ROE [returns on equity] will be feasible for 2023.

The fact that CU recently announcement the acquisition of $730 million of renewable energy assets and related development pipeline from Suncor Energy Inc. (SU).

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Presentation ATCO

These assets are primarily concentrated in Alberta, making them an excellent complement to CU’s existing power generation portfolio. They also provide a big boost to CU’s long-term decarbonization efforts, which so far have been pretty minimal.

And CU and ATCO should have plenty of relatively inexpensive financing to make attractive investments in the future, thanks to their A- and BBB+ quality credit ratings, respectively.

The proof of ATCO’s ability to generate long-term shareholder value is in the pudding, or rather, the 29-year dividend growth streak.

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Presentation ATCO

ATCO’s 4.5% dividend yield also remains very well protected by earnings, with a payout ratio of just 46.6% in the first half of 2022.

We estimate that ATCO is up 20% from its fair value. Combining that with dividends and growth, this Canadian gem should enjoy strong double-digit returns from here.

Conclusion

The world needs energy. And while we all have preferences about which sources should provide that energy, almost all of us would rather keep the lights on and our home warm than fulfill all of our energy preferences. This virtually guarantees that the world will continue to adopt an “all of the above” energy supply strategy for the foreseeable future.

As such, great opportunities exist for high-yield investors in all areas of energy, from oil and gas to renewables to utilities.

For long-term investors, at High Yield Investor, we believe BEP and ATCO are two phenomenal ways to generate high dividend income while helping to provide much-needed energy across the globe.