My high-yield income growth retirement portfolio is focused on four primary goals:

• Maximum safe yield
• Very fast long-term dividend growth potential
• Great valuation (high margin of safety)
• Maximum long-term total return potential

NRG Yield (NYLD) is my third largest position in that portfolio because it offers what I consider to be an excellent mix of all these factors. Better yet, its long potential growth runway means it likely has 10+ strong years of growth ahead, which from today’s attractive valuation means it should be capable of at least 20% annualized total returns in the coming years. If NRG Yield can indeed achieve these returns, then this would mean a 700+% total return over the coming decade. So let’s take a look at what makes this rapid growing renewable energy utility such a potential high-yield growth rockstar.

NRG Yield: A Fast Growing Renewable Energy Utility

NRG Yield was formed as a yieldCo in 2013 by utility NRG Energy (its sponsor) to buy its merchant power assets. A yieldCo is essentially a renewable energy utility whose primary job is to raise low cost capital from investors in order to buy long-term contracted power generation assets and then pass on most of that cash flow in the form of generous, safe, and steadily growing dividends. NYLD uses a 1099 tax form and it pays qualified dividends.

The yieldCo currently owns 6.5 GW of natural gas and renewable energy producing assets for which it has purchase power agreements or PPAs with other utilities. The initial length of these fixed rate (but inflation adjusted) contracts is 15 to 25 years and its average remaining contract is for 16 years. This means its cash flow available for distribution or CAFD (yieldCo equivalent to free cash flow and what funds the dividend) is extremely stable and recession resistant. That’s especially true given that 99% of its CAFD is under contract with investment grade regulated utilities which means essentially no risk of a contract default.

Source: investor presentation

The yieldCos assets are highly diversified across 17 states and focused primarily on wind and solar projects.

NRG currently owns 46% of NYLD’s shares but in 2017 decided to refocus its business on its traditional non renewable generation business and thus would no longer be NYLD’s sponsor.  As a result the stock has been badly beaten down and remained incredibly undervalued due to the uncertainty about where its future growth would come from. That’s because the yieldCo business model is predicated on buying new energy assets under long-term contract from two sources. The first is the sponsor’s right of first offer or ROFO pipeline. This is the list of projects that a sponsor has set aside for its yieldCo to buy if it can raise sufficient low cost capital. The other source is the sponsor’s backlog of green energy growth projects, which is what refills the ROFO pipeline over time. This is what ultimately ensures a steady stream of growth asset drop downs that enable CAFD/share and the dividend to keep growing over time.

With NRG deciding to sell its stake in NYLD and abandon its sponsorship of the yieldCo, shares have been under immense pressure. But in late 2017 NRG announced it was selling its NYLD stake (and sponsorship) to Global Infrastructure Partners or GIP, which will take over as NYLD’s sponsor in Q3 of 2018. This means that the future growth uncertainty overhang is now gone which clears the way for NRG Yield to continue growing strongly in the coming years and decades.

GIP was founded in 2006 and is a leading infrastructure investment firm, with over $45 billion in assets under management. $9 billion of those assets are invested in renewable energy projects. GIP has extensive experience with yielCos, including founding the first one in Europe and running the largest one in Asia. GIP has already backstopped NYLD’s acquisition of two major energy projects which represent 681 MW of new capacity or roughly 50% of the current ROFO pipeline. Specifically GIP has guaranteed up to $1.9 billion in financing in case NYLD can’t obtain attractively priced financing for its growth projects. These two acquisitions, which are scheduled to close later this year, will boost the yieldCo’s CAFD by 16%. More importantly GIP has already shown itself to be a good sponsor, offering NYLD highly attractive terms for these dropdowns, with 9.5% to 11% cash yields (above the industry average of 9% to 10%).

And thanks to GIP replacing NRG as its sponsor, NYLD’s share price has recovered sufficiently to allow it to once more tap equity markets at accretive prices (meaning that CAFD/share grows with each new acquisition). In total the yieldCo has $880 million in current liquidity to funds its growth, which means strong CAFD growth is all but assured for at least the next two years. Beyond that GIP has agreed to invest in NRG’s 6.4 GW backlog of renewable projects which have already been started, but with NRG no longer wishes to be involved with. This 6.4 GW of new projects will be the main long-term growth driver for NYLD’s CAFD/share, dividend, and total returns. And thanks to strong growth rates in all of those key metrics, NRG Yield has the potential to become of the hottest high-yield dividend growth stocks of the next decade.