Big changes are coming to the American power generation market.
In fact, the disruption of the current utility power generation/distribution model has already started. And investors who see what’s coming stand to make a lot of money on this inescapable trend.
Last Friday, July 18, a company called TerraForm Power IPO’d on the Nasdaq under the ticker symbol TERP. TerraForm Power is a solar energy company, and it’s part of a group of renewable energy companies that are changing the way the sector functions.
In the early years, solar energy development was dependent on existing utility companies. Congress made token demands that a small percentage of utility power generation had to come from renewable sources like wind or solar. So utilities would install some panels, promise to install some more, and go about their business.
Under this model, renewable energy would never become a viable energy source in the U.S. There was such little incentive to make the investment.
But now, two factors have changed the entire dynamic of renewable energy adoption…
First, solar panels themselves have fallen in price. In fact, costs have dropped so dramatically that solar panels are not far from being competitive with traditional energy sources like coal and even natural gas.
Second — and more importantly — renewable energy generation has found its own source of capital to fund deployment. This means the technology is no longer dependent on big utility companies and their token investments.
Renewable energy, especially solar, is now in a self-fulfilling cycle. The investment capital is readily available, costs are in line, and a new, viable sector is being born.
Warren Buffett and Elon Musk
I’m sure you recognize Warren Buffett’s name. You may also be familiar with Elon Musk — after all, he’s the founder of popular electric car company Tesla Motors (NASDAQ: TSLA).
He’s also the founder of SolarCity (NASDAQ: SCTY).
SolarCity has revolutionized the consumer solar market by providing affordable funding to homeowners who put solar panels on their homes. As a testament to the popularity of this idea, SolarCity revenues have gone from $59 million in 2011 to an estimated $298 million this year. And they’re expected to nearly double again in 2015 to $500 million.
Clearly, people want solar power in their homes. But the biggest push is coming from people like Warren Buffett.
In 1999, Buffett’s Berkshire Hathaway bought 80% of a power generation company called MidAmerican Energy Holdings for around $2 billion. MidAmerican was primarily a natural gas electrical and pipeline company.
But since 1999, MidAmerican (now known as Berkshire Hathaway Energy) has invested $15 billion in solar and wind power generation. And in June, Buffett said: “There’s another $15 billion ready to go, as far as I’m concerned.”
Sure, Buffett is using renewable energy tax credits to help fund the investment. But you can be sure he wouldn’t be investing in renewable energy if he didn’t see a bright and profitable future.
How to Get Solar Dividends
Warren Buffett has helped prove that long-term investment in renewable energy is viable. And now other renewable energy companies have hit upon a strategy pioneered by none other than T. Boone Pickens that could put growth into hyperdrive…
In 1979, T. Boone Pickens had a problem: the company he founded in 1956, Mesa Petroleum, was having trouble growing. Oil prices were basically stagnant. And even though Mesa was a profitable company, it was having difficulty raising enough money to invest in new production.
So Pickens hit on a novel idea: what if he sold the future production of Mesa’s existing oil wells and used the cash to acquire more oil reserves? Shareholders would collect the oil revenue in monthly dividends, just as they would with a REIT or MLP.
This type of structure is happening in the renewable world now, only these new companies are called “yieldcos” — fancy talk for “yield company.”
Yieldcos are spinoffs from companies that develop big renewable installations, like solar farms or wind farms. The yieldco buys the installation from the parent company, providing the parent company with cash to fund new developments.
The yieldco then has a steady stream of income from the installation, which it will use to pay dividends and fund other purchases.
The company I mentioned earlier, TerraForm, is one of these yieldcos. It was spun off from parent company SunEdison (NYSE: SUNE) at $25 a share.
TerraForm will be paying a $0.90 annual dividend (around 2.7%), which is expected to grow 15% a year for at least three years.
You could take in $4.36 a share in dividends on this stock and enjoy the upside from the shares, too. TerraForm raised $565 million in the IPO, so it has cash to invest. And it’s already up 32% since its IPO last week.
I expect we’re going to see some more yieldcos come to the market in the months ahead. In the meantime, you can also check out NRG Yield (NYSE: NYLD), NextEra Energy Partners (NYSE: NEP), and Pattern Energy Group (NASDAQ: PEGI).
My favorite solar energy company trades just above $11 a share and has a very low P/E of 8. I’ve shown some investors how to use a special, low-risk strategy to take more than 10% in cash “dividend” payments on this stock in the last six months. And I expect to take another 10% (at least) before the end of the year.
Until next time,
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.