Renewable energy stocks and dividends are not often thought of as synonymous, but an emerging asset class is changing that.
YieldCos are income-generating assets from the renewable energy space that look to deliver steady income to investors. Spun off as fully developed assets from parent companies, such as solar firms and wind farm operators, yieldcos are comparable to master limited partnerships (MLPs), an asset class that has been widely embraced by income investors in recent years.
A new ETF, the Global X YieldCo Index ETF (NasdaqGM: YLCO) helps investors access the burgeoning yieldcos asset class.
“YieldCos are formed when energy companies spin off fully developed assets, such as wind and solar farms, with long term contracts and an objective of returning cash flows to shareholders. Market capitalization for the YieldCo industry currently stands at $39 billion. With 11 announced IPOs in the pipeline, it has become an increasingly popular vehicle for energy firms,” according to a statement issued by Global X.
YLCO, which tracks the Indxx Global YieldCo Index, is home to 20 stocks with the ETF’s top 10 holdings combining for nearly 65.7% of the fund’s weight. Some of YLCO’s largest holdings include TerraForm Power (NasdaqGS: TERP), Brookfield Renewable Energy Partners (NYSE: BEP), SuneEdison (NasdaqGS: SUNE) and First Solar (NasdaqGS: FSLR). [Solar ETF Lessons]
“By design, YieldCos have significantly lower risk profiles than their parent companies, as they typically contain only stable energy producing assets with predictable cash flows, and are not involved in the riskier business of bringing new projects online. Additionally, their primary focus is on distributing available cash flows to shareholders, rather than reinvesting in new technologies or building new projects,” according to Global X.
YieldCos are typically lowly correlated to traditional equities and do not generate the pesky K-1 tax forms investors in individual MLPs have to deal with every tax season.
“Yieldcos, sometimes referred to as ‘synthetic MLPs,’ are structured to simulate the avoided double-taxation benefit of MLPs and REITs. This means that rather than taxation taking place twice (once at the corporate level and again at the shareholder level), the yieldco is able to pass its untaxed earnings through to investors,” according to the National Renewable Energy Laboratory.
As an asset class, yieldcos currently yield 3.3%, well above U.S. and global equity benchmarks as well as 10-year Treasurys. YLCO charges 0.65% per year.
Chart Courtesy: Global X