3 Energy Income Stocks You Can Feel Good About Owning — The Motley Fool

While fossil fuels are vital to our economy, they can have an adverse impact on the environment. Because of that, investors can face an ethical dilemma of whether to put profits over principle. That said, while fossil fuels power some of the market’s highest-yielding companies, several clean energy producers also pay their investors very well. That means investors don’t have to let go of their convictions to collect a high yield from the energy sector.

Three notable high-paying options are Covanta Holdings (NYSE:CVA), Pattern Energy Group (NASDAQ:PEGI), and Brookfield Renewable Partners (NYSE:BEP). Here’s a closer look at a trio that offers investors the ability to add an income stream to their portfolio that they can feel good about owning.

Image source: Getty Images.

Getting close to the tipping point

Energy-from-waste leader Covanta currently offers investors an eye-popping 6.9% yield. However, this high-yielding renewable energy stock is a bit higher risk than others in the sector.

Covanta’s current guidance is that it will generate $100 million to $150 million in free cash flow this year. Given that the company’s current dividend outlay is $130 million, it needs to hit the higher end of that guidance to support its payout. Furthermore, its leverage ratio is a concern since it was an unnerving 7.0 times at the end of last quarter, up from a still elevated 5.4 times at the end of 2015.

That said, earnings and cash flow appear poised to improve over the coming years. For starters, the company expects its new Dublin facility to start commercial operations in the fourth quarter while its Fairfax plant should return to service by year-end. In fact, Dublin alone will bolster earnings by $60 million per year. Meanwhile, the company recently enhanced its development pipeline in the UK via a joint development agreement that added two new projects. Because of that, Covanta anticipates that it can generate 3% to 5% annual organic growth going forward. Add that to the fact that its business model produces predictable cash flow since hedges and contracts support 85% of its revenue, and it looks like Covanta can maintain its environmentally friendly dividend.

Breezy growth in the forecast

Wind power operator Pattern Energy also offers an enticing yield that’s currently 6.6%. This payout is on a more solid footing, since Pattern has locked in the bulk of its capacity under long-term contracts and its target payout ratio is 80% of its cash available for distribution. Furthermore, by holding back some capital, the company has built up a nice cash cushion that it can use to continue making acquisitions.

Pattern Energy has grown at a brisk pace over the past few years by steadily acquiring new facilities and has increased its owned capacity from 1,041 MW at its initial public offering in 2013 to a current portfolio of 2,644 MW. These new additions have propelled the company’s cash flow, which has enabled it to raise the dividend 13 times and by a nearly 34% rate since 2014. Meanwhile, the company is on track to almost double its portfolio by 2020. Pattern Energy already has 11 projects lined up, which include wind and solar plants in both North and South America, as well as in Japan. Given that embedded growth and its sound financial profile, Pattern Energy shouldn’t have any problems generating steady income growth for investors.

A hydroelectric dam on a river in the mountains.

Image source: Getty Images.

An almost mirror image but with a different focus

Brookfield Renewable Partners shares many similarities with Pattern. However, instead of focusing on wind, it primarily operates hydroelectric facilities, where it’s a global leader. Those assets also generate stable cash flow backed by long-term contracts, which supports Brookfield’s 5.6% yield distribution. Furthermore, that payout is on an even stronger financial footing since Brookfield only pays out about 70% of its cash flow and it has an investment-grade credit rating backed by low leverage metrics.

Brookfield uses its retained cash to build new renewable power plants. The company currently has more than 300 MW of wind and hydro facilities in development, half of which are currently under construction. It estimates that the incremental cash flow from these new facilities, when combined with the inflation escalators embedded in its contracts, will drive 5% to 9% annual growth in both cash flow and its distribution to investors.

Making green while going green

Whether it’s generating electricity from waste, wind, or water, investors have several ways to earn a compelling income stream from renewable energy. Furthermore, in the case of both Brookfield Renewable Partners and Pattern Energy, they can collect a high yield now that has an excellent chance of increasing at a steady pace over the next few years, given the growth they already have in the pipeline. That income with upside potential means investors can earn a good return without giving up on their convictions.

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