Summary
- Hannon Armstrong is a great way to earn a safe 4% yield and 14% long-term returns powered by the $7 trillion US green energy gold rush.
- But NEP is a lower risk way to earn slightly better yield and it's growing 50% faster. Management just reiterated guidance for 15% dividend growth through "at least" 2026.
- NEP's backlog of NextEra Energy projects to buy keeps getting bigger. NEP could keep hiking its dividend 3.3% per quarter until long past 2030, possibly for 30+ years.
- BAM is the king of infrastructure and green energy investing. It offers the same yield as HASI but is growing 50% faster and management is guiding for 20% returns for 20 to 30 years.
- NEP and BAM are a lower risk way to earn superior long-term income and returns. With HASI up 13% since I last recommended it, there is very little downside to my family portfolio selling HASI to add to BAM and NEP, boosting our long-term return potential by 1.2% per year.
This article was originally published on Dividend Kings on Monday, January 30th, 2023.
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On December 5th, I recommended Hannon Armstrong ( HASI ) to Dividend Kings members, and the results have been pretty good so far.
HASI is up 14% since then, an annualized return of 130%. As a long-term buy-and-hold investor, I don't care about short-term gains; I'm seeking hundreds or thousands of percent gains over years and decades.
But I recently sold HASI to buy more NextEra Energy Partners ( NEP ) and Brookfield Asset Management ( BAM ).
Let me show you why all three are great ways to profit from the $150 trillion green energy gold rush, but why my family's hedge fund is going with NEP and BAM over HASI.
Hannon Armstrong's Thesis Remains Intact... But
Further Reading
- Hannon Armstrong: A 5% Yield In A Trillion-Dollar Growth Market
- Hannon Armstrong: Dragged Through The Muddy Waters
Let me first address a common question I imagine many readers or members might have. "Are you selling HASI because of the Muddy Water's claims?" No I am not.
As Brad and Stephen Hester pointed out in their Muddy Water rebuttal, HASI's use of Payment in Kind or PIK payments is standard practice in the BDC industry.
But as Stephen Hester, our CFA on the Wide Moat Team, points out, the risk of accounting fraud isn't zero (it never is for any company).
So what is the probability of HASI cooking its books?
We have Ernst & Young, the auditor firm HASI uses vouching for its accounting (though not the quality of its loan book).
We have S&P with its BB+ (highest level of junk bond) stable credit rating and 84% long-term global risk management percentile rating, also offering us confidence that HASI's business is sound.
And we have one final piece of evidence that HASI isn't the next Luckin Coffee or Sino-Forest (two famous examples of accounting fraud Muddy Water got correct).
The Beneish M-score is an advanced accounting model that historically correctly identifies 76% of accounting fraud and 82.5% of companies with honest accounting.
Cornell University students used this metric to determine that Enron was cooking its books and would soon go bankrupt. While Wall Street was asleep at the wheel, the M-score (and Cornell) were sounding the alarm. And they were right.
If the M-score is -1.78 or lower, there is an 82.5% probability that a company's accounting is honest and trustworthy. HASI's M-score is currently -2.18, and its 13-year median is -2.09.
In other words, we don't just have to take Ernst & Young's word that HASI's accounting is accurate, or S&P's. We have independent confirmation from one of the most accurate fraud detection tools in financial history, saying that HASI is a speculative blue-chip.
- speculative because BB+ credit rating is still junk and speculative debt = speculative companies
That means a 2.5% or less max risk cap is appropriate for anyone comfortable with HASI's risk profile, which I still am.
Ok, so why am I selling HASI if the investment thesis remains intact?
Hannon Armstrong Is Great...But NextEra Energy and Brookfield Asset Management Are Far Better
To understand why my family hedge fund is selling HASI (at 13% profit) to buy more NEP and BAM, first, let's review what HASI is.
HASI is a hybrid mREIT/BDC that owns junior stakes in a portfolio of renewable asset loans. When a big utility like AES ( AES ) wants to build 1.3 GW of solar and wind projects, it takes out debt, sometimes green bonds.
Since 1981, HASI has masterfully filled the role of green energy financier. It has a long-term portfolio of green energy debt investments.
Its default rate since its 2013 IPO is 0.2% (something Muddy Waters claims is evidence of fraud since it's the lowest of any BDC or mREIT by a wide margin).
Management says the default rate is so low because of due diligence and the nature of its business.
- HASI is very careful about what green energy deals it finances or what green energy bonds it buys
Also, since these are utility-like assets that usually save customers money, it's the last thing they default on if they get in trouble financially.
- If they don't pay, their lights get turned off
That's the good news about HASI, which enjoys a steady stream of long-term cash flow. The bad news, which is part of its speculative risk profile, is mostly in three things.
- HASI is a minority (junior) creditor in most of its deals
- HASI doesn't own the physical assets nor does it manage them
- Eventually, it must replace its loans with new ones to maintain its cash flow (the case with all BDCs and mREITs)
HASI is a kind of green energy bank that relies on a diversified portfolio of 295 investments to manage its default risk.
HASI was booming in 2022, with 20% growth in its portfolio.
But long-term, due to the need to finance new deals with equity (just like REITs and yieldCos), its growth per share is slower.
Analysts expect HASI to grow its earnings and dividends per share at about 10% over time. Combined with a 4.2% safe yield today, that means about 14.4% long-term return potential.
Note that due to higher interest rates HASI's growth is expected to fall to 7% to 8% in 2023 and 2024.
When I first bought HASI, it was the best way to invest in the green energy gold rush, which Bloomberg estimates is a potential $150 trillion growth market over the next 30 years.
- Brookfield agrees, calling it the 2nd largest investment opportunity in human history.
But since buying HASI, my family's hedge fund also bought NEP and BAM, and here's why I've decided that those deserve the money we had allocated to HASI.
Why NextEra Energy Partners And Brookfield Asset Management Are My Two Favorite Ways To Invest In Green Energy
Further Reading
- Why I Bought 4.3% Yielding NextEra Energy Partners
- Is NextEra Energy Partners Worth Considering? I Believe So
Both I and my fellow Dividend King Sebastian Wolf like NEP and here's why.
It's managed and 25% owned by NextEra Energy Inc. ( NEE ), the largest green energy producer on earth.
NextEra Energy Inc is building about 32GW of solar and wind projects that it eventually wants to drop down, or sell, to NEP.
On top of that, it already owns 20 GW of assets that NEP hasn't yet bought.
NEP has 8.3 GW of total energy capacity, and NEER owns 20 GW of contracted capacity plus is building 32 GW more by 2025.
- 42 GW of growth capacity vs. 8.3 GW of current capacity
- 6.3X potential growth capacity = 84% annual growth rate capacity
Is NEP going to buy 52 GW of new green energy projects in five years? Almost certainly not. It's simply not big enough and can't arrange large enough financing for all that.
But guess what? NEP is big enough to do? Grow its dividend 15% annually through 3.3% quarterly hikes, just as it's been doing since its 2014 IPO.
NextEra Energy Partners now sees 12% to 15% growth per year in limited partner distributions per unit as being a reasonable range of expectations through at least 2026 , which is one additional year beyond prior expectations, driven by the partnership's long-term growth visibility." - NEP
NEP has been guiding for 12% to 15% annual dividend growth for the next three years since its IPO in mid-2014. Every year they reiterate that same growth range and extend it another year. And NEP has grown at the top end of its range the entire time, eight years of 3.3% quarterly payout hikes.
With the capacity to boost its assets by 6.6X just on NEE's current green energy asset base and backlog, that 15% growth could last long past 2030.
NEE estimates the growth opportunities in the US alone are $2 trillion to $4 trillion through 2050, representing a 17X to 33X increase in green energy capacity over the next three decades.
Or, to put it another way, NEER's 32GW growth backlog represents 0.5% to 1% of the growth potential over the next three decades.
Basically, NEE is big enough to build exponentially more green energy projects than NEP can buy.
This means that NEP's management, which is from NEE, can keep growing at 12% to 15% (probably 15%) for the foreseeable future, potentially the next 30 years, or even longer.
Why Brookfield Is Another Great Way To Invest In Green Energy...And Everything Else
Further Reading:
- How 4.6% Yielding Brookfield Asset Management Could Change Your Life
- Brookfield Vs. Blackstone: One Clear High-Yield Winner
Brookfield has been around for 121 years and is the world leader in infrastructure and green energy alternative asset management.
They are close behind Blackstone as the #1 alternative asset manager on earth.
Remember how Brookfield said that green energy was the #2 largest investment opportunity in history? Guess what's #1? It's alternative asset management itself.
Why? Because guess how the world is going to pay for $150 trillion in green energy projects? Guess who is going to fund trillions in AI, and robotics R&D? Guess who is helping Intel ( INTC ) build a $30 billion chip factory in Arizona? That's right; it's Brookfield.
Alternative asset management is about so much more than infrastructure.
Why are alternative assets the ultimate gold rush? Because they encompass every part of the global economy.
- green energy
- infrastructure
- private credit
- private equity
- venture capital
- private real estate
- long/short stocks
- long/short bonds
- long/short commodities
- long/short currencies
- trend following
- leveraged investments
- options
- etc.
How big is this market potentially? According to Blackstone, it's about $300 TRILLION and doubled in the last five years (15% annual growth).
Why do I love BAM as a green energy investment? Because guess who runs Brookfield Renewable Partners ( BEP ) and Brookfield Renewable Corp. ( BEPC )? BAM does, and it collects fees from investors that turn into 75% free cash flow margins.
BEP is guiding for 7% to 9% long-term growth and offering the same yield as BAM.
- BEP: 4.4%
- BEPC (no K1 version): 4.1%
- BAM: 4.0%
The only difference between BEPC and BAM's yield is that BAM is a variable payer.
However, thanks to what management describes as "annuity-like cash flow," BAM's dividends are likely to be a lot more stable than BX's.
What makes BAM's cash flow so stable? The fact that it's almost entirely coming from long-term committed capital. Investors generally do so under 7 to 15-year lock-ups when investing in BAM funds.
BX is more focused on performance fees than BAM the "20%" in the 2 and 20 formula.
BAM is focused more on the 2% asset management fee part (note that its average asset management fee is actually 0.75%). I'm just using this as an example.
- 2% and 20% is mostly only used by hedge funds these days
Ok, so you get a variable 4% yield that should be RELATIVELY stable compared to alternative asset manager peers.
But here is why BAM and NEP are my favorite green energy investments.
The Yield Is The Same...But The Growth Is Much Better
HASI, NEP, and BAM all yield a similar 4% to 4.5%. But their business models are very different.
- HASI owns nothing but a portfolio of green energy loans with relatively longer duration than the 2 to 5 years common among BDCS
- NEP owns green energy assets directly and manages them
- BAM owns an empire of alternative asset funds, including BEP and BEPC that send it insanely profitable and stable cash flow forever
NEP buys assets from NEE that usually come with 20-year power purchase agreements or PPAs. Those assets can last for 30 to 50 years, depending on what they are.
BAM's annuity-like fee income isn't likely to dry up...ever. Why?
Because BAM has been delivering 15% to 19% returns for institutional investors for nearly 40 years.
Guess what it's done for its shareholders? Even better.
That's why BAM's growth has been extraordinary in the last 20 years alone.
- assets up 250X (32% CAGR)
- fee-bearing capital up 292X (33% CAGR)
- revenue up 218X (31% CAGR).
BAM has grown at a rate that Amazon ( AMZN ) would be proud of. And its total returns for investors? Since 1987 20% annual returns. Literally the same returns that made Buffett the greatest long-term investor of all time (sustained over 55 years).
But guess what? Management says it can deliver for the next 20 to 30 years—similar Buffett-like 20% returns.
- 4% to 5% yield + 15% to 16% growth
What is green energy income investing all about? Safe yield? Sure. But above all else, growth, growth, and more growth.
BAM and NEP Are Growing 50% Faster Than HASI
Investment Strategy | Yield | LT Consensus Growth | LT Consensus Total Return Potential | Long-Term Risk-Adjusted Expected Return |
Brookfield Asset Management (Management Guidance) | 4.0% | 16.0% | 20.0% | 14.0% |
NextEra Energy Partners (Management Guidance) | 4.5% | 15.0% | 19.5% | 13.7% |
Hannon Armstrong | 4.2% | 10.2% | 14.4% | 10.1% |
ZEUS Income Growth (My family hedge fund) | 4.1% | 9.3% | 13.4% | 9.4% |
Schwab US Dividend Equity ETF | 3.4% | 8.6% | 12.0% | 8.4% |
Vanguard Dividend Appreciation ETF | 1.9% | 10.0% | 11.9% | 8.3% |
Nasdaq | 0.8% | 10.9% | 11.7% | 8.2% |
Dividend Aristocrats | 1.9% | 8.5% | 10.4% | 7.3% |
S&P 500 | 1.7% | 8.5% | 10.2% | 7.1% |
REITs | 3.9% | 6.1% | 10.0% | 7.0% |
60/40 Retirement Portfolio | 2.1% | 5.1% | 7.2% | 5.0% |
(Source: DK Research Terminal, FactSet, Morningstar)
HASI can boost almost any portfolio's yield and return potential.
- 2.5% or less max risk cap rec
But NEP and BAM can boost it even more.
For example, here's what my family's hedge fund, the ZEUS Income Growth Portfolio looked like before.
What The Dividend Kings ZEUS Income Growth Portfolio Looked Like On December 5th
Stock | Yield | Growth | Total Return | Weighting | Weighted Yield | Weighted Growth | Weighted Return |
QQQM | 0.7% | 11.9% | 12.6% | 16.67% | 0.1% | 2.0% | 2.09% |
SCHD | 3.5% | 7.6% | 11.1% | 16.67% | 0.6% | 1.3% | 1.85% |
EDV | 4.1% | 0% | 4.1% | 16.67% | 0.7% | 0.0% | 0.68% |
DBMF | 9.5% | 0% | 9.5% | 16.67% | 1.6% | 0.0% | 1.58% |
AMZN | 0.0% | 19.2% | 19.2% | 5.56% | 0.0% | 1.1% | 1.07% |
LOW | 2.0% | 20.6% | 22.6% | 5.56% | 0.1% | 1.1% | 1.26% |
MA | 0.6% | 23.2% | 23.8% | 5.56% | 0.0% | 1.3% | 1.32% |
BTI | 6.5% | 10.4% | 17.4% | 4.72% | 0.3% | 0.5% | 0.82% |
ENB | 6.1% | 5.1% | 11.2% | 4.72% | 0.3% | 0.2% | 0.53% |
MO | 8.4% | 5.0% | 13.4% | 4.72% | 0.4% | 0.2% | 0.63% |
HASI | 4.7% | 10.8% | 15.50% | 2.50% | 0.1% | 0.3% | 0.39% |
Total | 4.2% | 10.3% | 14.5% | 100.00% | 4.2% | 8.0% | 12.2% |
(Source: DK Research Terminal, FactSet)
4.2% yield and 12.2% historical and future consensus return potential.
- 10% to 14% annual income growth
That's awesome. But look what adding BAM and NEP and removing HASI can do.
What The Dividend Kings ZEUS Income Growth Portfolio Looks Like Today
Stock | Yield | Growth | Total Return | Weighting | Weighted Yield | Weighted Growth | Weighted Return |
OMFL | 1.7% | 13.4% | 15.1% | 6.67% | 0.1% | 0.9% | 1.0% |
VIG | 1.9% | 10.0% | 11.9% | 6.67% | 0.1% | 0.7% | 0.8% |
SCHG | 0.6% | 12.8% | 13.4% | 6.67% | 0.0% | 0.9% | 0.9% |
SPGP | 1.3% | 15.2% | 16.5% | 6.67% | 0.1% | 1.0% | 1.1% |
SCHD | 3.4% | 8.6% | 12.0% | 6.67% | 0.2% | 0.6% | 0.8% |
EDV | 4.1% | 0% | 4.1% | 13.33% | 0.5% | 0.0% | 0.5% |
DBMF | 9.0% | 0% | 9.0% | 10.00% | 0.9% | 0.0% | 0.9% |
KMLM | 9.4% | 0.0% | 9.4% | 10.00% | 0.9% | 0.0% | 0.9% |
AMZN | 0.0% | 19.2% | 19.2% | 4.17% | 0.0% | 0.8% | 0.8% |
LOW | 2.0% | 20.6% | 22.6% | 4.17% | 0.1% | 0.9% | 0.9% |
MA | 0.6% | 23.2% | 23.8% | 4.17% | 0.0% | 1.0% | 1.0% |
ASML | 0.8% | 24.5% | 25.3% | 4.17% | 0.0% | 1.0% | 1.1% |
BTI | 7.4% | 10.4% | 17.8% | 3.33% | 0.2% | 0.3% | 0.6% |
ENB | 6.3% | 4.9% | 11.2% | 3.33% | 0.2% | 0.2% | 0.4% |
MO | 8.3% | 5.0% | 13.3% | 3.33% | 0.3% | 0.2% | 0.4% |
BAM | 3.9% | 14.6% | 18.5% | 3.33% | 0.1% | 0.5% | 0.6% |
NEP | 4.4% | 15.0% | 19.4% | 3.33% | 0.1% | 0.5% | 0.6% |
Total | 4.0% | 11.5% | 15.5% | 100.00% | 4.1% | 9.3% | 13.4% |
(Source: DK Research Terminal, FactSet)
The same yield as before, but 1.2% higher future return potential (and historical returns) and 11% to 15% income growth potential.
The portfolio is better with more NEP and BAM and without HASI, as well as two new ETFs and replacing QQQM with SCHG.
At least it is for my family's needs, and that's why my family has personally dropped HASI, beefed up BAM and NEP a bit, and added a bit more diversification through specialized ETFs.
- My next article will explain why we added SPGP and OMFL to the portfolio.
Bottom Line: HASI Is A Great Way To Profit From Green Energy...But BAM and NEP Are Even Better
Hannon Armstrong is a great way to earn steadily rising yield while enjoying strong long-term returns, likely for decades.
But NextEra Energy Partners and Brookfield are a lower risk way to earn the same yield and enjoy potentially 50% faster growth for decades.
Does that mean everyone should sell HASI? Absolutely not. It has plenty of gas left in the tank.
But for my family's needs? The same yield and significantly superior growth makes it a clear choice. If you can't own everything, then owning the best makes sense.
While HASI is good, you can't beat NextEra and Brookfield when it comes to green energy.
For further details see:
Three 4+% Yielding Blue-Chips Profiting From A $150 Trillion Megatrend