The rule of 72 is a quick financial formula that can help investors determine how quickly an investment can double their money. You divide 72 by the expected rate of return, and the result is the years it would take for an investment to double in value based on that return.
For example, an investment earning a 15% return would double an investor’s money in under five years (72/15=4.8). While a 15% average annual return is well above the stock market’s average return of 9.4% over the last 50 years, many companies have the potential to achieve that level of return over a shorter period.
Brookfield Renewable (BEP) (BEPC) and NextEra Energy Partners (NEP) stand out as stocks with mid-teens total return potential over the next several years. Here’s what powers that view.
Powerful growth ahead
Brookfield Renewable has delivered a 17% annualized total return over the last five years and 16% since its inception. That has exceeded the company’s target of generating 12% to 15% total annual returns over the long term.
The renewable energy juggernaut has the power to potentially produce total returns at or above the high end of its long-term target range over the next five years. As the following slide showcases, it has several drivers that should grow its funds from operations (FFO) at a more than 10% compound annual rate through at least 2027:
IMAGE SOURCE: BROOKFIELD RENEWABLE.
The company has already secured and funded enough opportunities to grow at an 8% annual rate during that timeframe. Add in its 4%-yielding dividend, which the company expects to grow by 5% to 9% per year, and Brookfield has the power to produce a 12% average annual return.
However, there’s ample reason to be optimistic it can deliver the double-digit FFO per share growth needed to produce a total return in the mid-teens. Drivers include:
- Elevated inflation rates.
- Growing demand for renewable power.
- An extensive renewable project backlog.
- Acquisitions.
The company recently secured a needle-moving deal. It’s partnering with several other companies and investors to acquire Australian utility Origin Energy (ORG 0.84%). That will enable Brookfield to help lead that company’s decarbonization by building out renewable energy capacity to retire Origin’s coal-fired power plant. These investments should grow its cash flow. That’s the first of what could be many decarbonization-focused investments for Brookfield Renewable in the coming years.
High-octane dividend growth
NextEra Energy Partners has produced a 12.9% average annual total return over the last five years. The clean energy infrastructure company could generate even higher returns over the next several years:
IMAGE SOURCE: NEXTERA ENERGY PARTNERS.
As that slide showcases, the company expects to grow its distribution per share at a 12% to 15% annual rate through at least 2026. With that payout now yielding over 5%, it could easily deliver total returns in the mid-teens and above.
The company has several growth drivers. A big one is acquiring operating renewable energy assets from its parent NextEra Energy (NEE). The companies have completed several drop-down transactions over the years, including interests in 1.2 gigawatts of renewables and storage assets last year. These deals enable NextEra Energy to recycle capital into new developments. Meanwhile, they supply NextEra Energy Partners with incremental income to grow its dividend. NextEra Energy has a vast and growing portfolio of renewable energy assets it could drop down to its affiliate to fully power its dividend growth plan.
NextEra Energy Partners can also purchase assets from third-party sellers. For example, it bought a roughly 400-megawatt wind energy portfolio from Brookfield Renewable for $733 million in 2021. It can also invest in organic expansion projects in its existing portfolio. Organic growth opportunities include adding battery storage to wind or solar assets and repowering legacy wind farms by replacing the turbines with newer, more powerful ones. These outside opportunities increase the probability that NextEra Energy Partners can achieve its dividend growth strategy.
High-powered dividend stocks
Brookfield Infrastructure and NextEra Energy Partners are benefiting from the decarbonization megatrend. It provides them with many opportunities to grow their portfolios and expand their cash flows so they can increase their dividends. That income and earnings growth combination should give them the power to generate total returns approaching the mid-teens. They could double an investor’s money in less than five years.
— Matthew DiLallo
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Source: The Motley Fool