The Best Energy Dividend Stock for a Lifetime of Passive Income

The energy industry has historically been a great sector to generate passive income. Many energy companies generate stable cash flows backed by long-term contracts and regulated tariffs, allowing them to pay attractive dividends.

While the energy sector is currently in transition, it is heading towards a more sustainable future powered by renewable energy. Because of this, companies that focus on cleaner energy sources should be able to generate sustainable cash flow for decades to come. Is one of the leaders in the transition to a cleaner future Brookfield Renewables (BEPC -1.88%) (BEPC -1.88%). That’s one of the many reasons it’s proving to be the best stock in the sector for those looking for consistency passive income.

Built to generate income

Brookfield Renewable has all the features needed to offer permanent passive income to its investors. It has a globally diversified portfolio of lower-carbon companies, including hydropower, wind, solar, energy storage, green hydrogen, energy transition and CO2 capture. It sells the electricity these plants generate to utilities and large corporations under long-term, fixed-rate power purchase agreements, most of which include annual escalation clauses. That allows Brookfield to generate very steady cash flow to support its dividend, which currently yields 3.1%.

Meanwhile, Brookfield complements its long-lived portfolio with a top-notch financial profile. Brookfield has investment-grade credit, a well-tiered debt profile with mostly fixed-rate financing, and plenty of cash. This gives the company a lot of financial flexibility. Brookfield also pays out a fair portion of its steady cash flow through its dividend (76% so far in 2022), giving it a cushion while allowing it to retain cash to fund its continued expansion.

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With a company that generates plenty of stable cash, a reasonable dividend payout ratio, and a strong balance sheet, Brookfield’s dividend is on rock-solid ground.

Strong growth ahead

Brookfield has also done a great job growing its dividend over the years. The company increased its payout by at least 5% earlier this year for the 11th straight year and has grown at a compound annual rate of 6% since 2000. It expects to grow its dividend by 5% to 9% annually over the long term.

It should have sufficient powers to achieve this goal. Brookfield estimates that a combination of higher electricity prices, improved margins, and development projects will grow its funds from operations per share by 6% to 11% annually through 2026. The company also has a tremendous development pipeline to support high-end growth and its backlog has more than tripled its current portfolio of operations.

Meanwhile, the company contributes an additional 9% each year through acquisitions. That enables Brookfield to grow its dividend at a healthy pace while lowering its payout ratio, putting the payout on an even more sustainable long-term footing.

The company has a tremendous opportunity to grow beyond this time frame. It estimates a more than $150 trillion commercial opportunity over the next 30 years to decarbonize the global economy. This should allow the company to further expand its renewable energy activities while capitalizing on the emergence of new growth opportunities such as carbon capture and green hydrogen. Given its strong balance sheet, Brookfield has enough financial flexibility to continue to expand in the years to come.

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A permanent stream of income from dividends

Brookfield Renewable has been a terrific passive income stock over the years. This should remain so in the future. It built its business around generating sustainable revenue. In the meantime, given its leverage on the decarbonization megatrend, it has plenty of growth ahead of it, which should give it the power to keep growing its dividend. These traits make it one of the best energy stocks for those looking for a sustained stream of passive income that can last a lifetime.

Matthew DiLallo owns positions in Brookfield Renewable Corporation Inc. The Motley Fool owns positions in and recommends Brookfield Renewable Corporation Inc. The Motley Fool has a disclosure policy.

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