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Dividend Investors’ Guide to Yieldcos

When it comes to investments that boast higher-than-average yields, most dividend investors think of REITs (real estate investment trusts) and MLPs (master limited partnerships).

But few investors know of a newer financial instrument, which just began trading last July.

I’m talking about yieldcos.

What Makes Yieldcos Unique

Those that do know about this new investment vehicle understand that yieldcos are spinoffs from utility companies.

But they’re much more than that…

In essence, a yieldco is the utility industry’s answer to REITs and MLPs.

Most of the proceeds from generating and delivering electricity are distributed to their shareholders in the form of a steady stream of quarterly dividends.

The assets placed into a yieldco by its parent utility are tied to long-term and predictable power contracts.

And as with similar instruments, ideally the dividend payout will steadily increase as the income of the yieldco rises. This happens through the acquisition of more power-generating assets with the remaining non-distributed funds.

The most important trait of yieldcos, however, is that they offer a much safer way for investors to own a piece of the very volatile renewable energy industry.

You see, although yieldcos are subject to corporate tax, most renewable energy projects don’t actually generate taxable income for many years. So, in effect, for many yieldcos, the distributions are considered nontaxable returns of capital to shareholders.

And it’s important to note that yieldcos allow investors to focus their investment dollars on cash flows generated by power plants – without having exposure to other parts of a utility’s business.

From the standpoint of the renewable energy industry worldwide, yieldcos have quickly become a godsend. It’s given the industry a wonderful opportunity to gain access to newer and cheaper capital for projects. Yieldcos are the hottest trend in energy finance and a big step forward in the financing of clean energy projects globally, which traditionally have had problems raising funds.

How to Get on Board

More and more yieldcos have come to market since the first one – NRG Yield (NYLD) – launched last July.

Good thing, too, since NRG’s popularity has pushed the yield down to 2.7%.

One yieldco worthy of your attention is a subsidiary of Spanish utility Abengoa SA (ABGB), called Abengoa Yield PLC (ABY). It owns transmission lines, along with renewable and conventional power assets, in Spain, South America, and North America. Its renewable energy assets include solar power plants and solar concentrating power plants.

This yieldco IPO’d in June, and the management target for the dividend initially is $1.04 annually.

Another yieldco worth a look is the former SunEdison Yieldco, now called TerraForm Power (TERP). Its parent SunEdison (SUNE) placed into the spinoff solar projects in the United States, Canada, and Chile. It IPO’d in mid-July, and the management target for the dividend is $0.90 annually.

This is just the beginning of a trend toward yieldcos in the electric utility industry – and, more specifically, the renewable power industry.

Don’t be surprised if the major players in solar, namely First Solar (FSLR) and SunPower (SPWR), issue their own yieldcos in the near future.

I will keep readers informed of such exciting developments in the sector.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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