3 YieldCos to Buy With Outstanding Dividend Growth Expected

Like it or not, the Federal Reserve will be raising interest rates, most likely starting this year. Investments that traditionally suffer the most in a rising interest rate environment are traditional utilities and real estate investment trusts (REITs), and, of course, bonds. So what are investors to do? The best suggestion is buy shares in stocks that will raise dividends to help match any rate increases the Fed has planned.

In a new and exhaustive report, RBC analysts do the ultimate deep-dive into the publicly traded yieldcos. We screened the report for the three with the highest current yield that are expected to grow those yields this year and in 2016. The three that showed up best are all rated Outperform at RBC: Abengoa Yield PLC (NASDAQ: ABY), NRG Yield Inc. (NYSE: NYLD) and Pattern Energy Group Inc. (NASDAQ: PEGI).

Abengoa Yield

Abengoa Yield is a total return company that owns a diversified portfolio of contracted renewable energy, power generation and electric transmission assets in North America, South America and Europe. The company is focused on providing a predictable and growing quarterly dividend or yield to shareholders. Some on Wall Street see the company’s dividend rising to as high as the 9% range by 2018. The RBC team is expecting 10% to 20% dividend growth from the company over the next two years.

Abengoa investors are paid a 3.05% distribution. The RBC price target for the stock is $44. The Thomson/First Call consensus price target is $39.67. Shares closed Thursday at $33.91.

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NRG Yield

This company owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States, including fossil fuel, solar and wind power generation facilities that provide the capacity to support more than a million American homes and businesses. The company’s thermal infrastructure assets provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units in multiple locations. Some Wall Street analysts see distributions rising into the mid-5% range by 2018. The RBC team sees distributions increasing by 15% to 18% over the next two years.

NRG Yield investors are paid a 3.18% distribution. The RBC price target is $59, and the consensus estimate is $57.83. Shares ended trading on Thursday at $49.20.

Pattern Energy

This independent power company has a portfolio of 12 wind power projects, with a total owned interest of 1,636 megawatts, in the United States, Canada and Chile that use proven, best-in-class technology. Pattern Energy’s wind power projects generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business. The company just completed a well-received secondary offering of shares. Analysts around Wall Street see the distribution rising to over 7% by 2018. The RBC team see distributions rising 12% to 15% over the next two years.

Pattern investors are currently paid a sizable 4.66% distribution. The RBC price target is $35, and the consensus target is $34.52. The stock closed on Thursday at $28.98.

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Rates will be going higher, though much slower than in past cycles. Either way, markets typically do not react great at the beginning of such cycles. Rotating out of sectors that are hit during rate increase cycles, before the increases start, makes good sense.