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Cryptocurrencies like bitcoin (BTC-USD) are all the rage these days, which isn’t a surprise considering their stratospheric run-up. Because of that, people who haven’t invested a dime are considering betting their meager life savings on something most people still don’t understand how it even works. Those who do are playing a dangerous game that will “with almost certainty…come to a bad ending,” according to billionaire investor Warren Buffett.
The reason Buffett and others have warned against gambling on bitcoin is that its value rises (and falls) based on what someone else will pay for it, as opposed to what it can produce. While non-productive assets like that can increase in value for a while, the bubble almost always bursts. That’s why you’re better off forgetting about trying to make a fortune in bitcoin; instead, consider investing your hard-earned money into something that can produce something of great worth — and grow your wealth in the process.
One better-than-bitcoin investment option is companies that own and operate wind farms and solar power plants. Not only do they produce clean power that’s helping slowly wean the world off its addiction to fossil fuels, but they generate a steady stream of cash flow by selling that energy under long-term contracts. Three top options to consider are Brookfield Renewable Partners (NYSE:BEP), TerraForm Power (NASDAQ:TERP), and Pattern Energy(NASDAQ:PEGI). Here’s why.
A steadily growing cash flow stream
Brookfield Renewable Partners is a global leader in hydropower, operating 217 facilities in North and South America, as well as 55 wind farms. Overall, the company has the capacity to produce 15,300 megawatts (MW) of clean energy, which is enough to power about 6 million homes.
That renewable energy is great for the environment and investors in Brookfield Renewable Partners. That’s because the company sells this power to utilities and end users under long-term contracts, enabling it to generate a steady stream of revenue. Brookfield returns about 70% of this money to investors each year via cash distributions. To put its income stream into perspective, with units currently yielding around 5.6%, a $10,000 investment in Brookfield Renewable would generate about $560 in annual cash flow. Meanwhile, the company takes the 30% of cash it retains and reinvests the money into building additional hydro and wind facilities. Those investments will help it grow cash flow by 6% to 11% annually, giving the company the ability to increase cash distributions to investors by 5% to 9% per year.
A bright future
TerraForm Power shares many of the same characteristics as Brookfield Renewable Partners, which isn’t a surprise since both have the same parent company: Brookfield Asset Management (NYSE:BAM). That said, while Brookfield Renewable focuses on hydro, TerraForm Power operates 2,600 MW of wind and solar generating facilities, primarily in the U.S. Like its sibling, TerraForm secured long-term contracts for the power produced from these plants, enabling it to collect a predictable revenue stream.
The company plans on returning 80% to 85% of its cash flow to investors each year, which puts its yield around 6.3%. That means a $10,000 investment could generate about $630 in dividends per year. Meanwhile, the company plans to reinvest what it doesn’t send back to investors into additional renewable energy capacity. That strategy should enable TerraForm to steadily grow cash flow, giving it the money to increase its dividend 5% to 8% each year.
Pattern Energy currently just focuses on wind power, operating 20 facilities across the U.S., Canada, and Chile. It has also secured long-term contracts for the bulk of these plants, which enables it to generate steady cash flow to send back to investors. It currently has the highest dividend yield of this trio at 8%, mainly because it pays out nearly all its annual cash flow. That means a $10,000 investment would net roughly $800 per year in dividends.
That payout appears likely to head even higher in the coming years. Pattern Energy owns 2,736 MW of clean power capacity, but it plans to grow its portfolio up to 5,000 MW by 2020 and has already secured the right-of-first-refusal to acquire half the facilities needed to meet that goal. The company estimates that this growth will enable it to increase cash available for distribution per share by a high-single- to a low-double-digit annual rate over that time frame, likely leading to a similar growth rate in its already lucrative dividend.
Why gamble when these investments can be real winners?
In many ways, buying bitcoin is like purchasing a lottery ticket. That bet might pay off, or it could “come to a bad ending.” It’s a risk not worth taking, especially when there are better things to invest your hard-earned money into — like renewable power. In the case of this trio, they can put more money in your pocket each year while making the planet a better place at the same time, which is a potential win-win investment.
Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Renewable Energy Partners, and TerraForm Power and has no position in any cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.