Get Paid High Income With Renewable Energies
By Scott Chan
Income investors no doubt know about real estate investment trusts (REITs) and master limited partnerships (MLPs).
REITs were set up to give average Joes a chance to invest in real estate properties without needing hundreds of thousands of dollars by owning units in these trusts. By law, to qualify as a REIT for tax purposes, a company must distribute at least 90% of taxable income to unitholders each year.
On the other hand, MLPs give investors a chance to own a piece of America's energy infrastructure. Unlike REITs, MLPs don't have a tax-related requirement to distribute at least 90% of taxable income to unitholders, but MLPs nevertheless pay out most of their free cash flow to unitholders.
Thus, both REITs and MLPs are known for their relatively high yields and generous dividend policy.
In the last 10 years, as the renewable energy industry has rapidly grown, a new class of high income paying investment vehicle has emerged as well in that industry.
They are called yieldcos.
Why a YieldCo?
Developing renewable-energy projects (wind, solar, hydroelectric, etc.) are large and risky endeavors. As a result, raising capital is difficult and expensive. However, once the projects are completed, they become very stable revenue generators with low maintenance costs.
To separate the low-risk operational assets from the riskier assets under development, renewable-energy companies formed yieldcos.
A yieldco typically works as follows: A parent company, usually a renewable-energy developer, forms a public subsidiary (the yieldco). The parent company then sells (or "drops down") operational assets, often already with existing long-term power agreements with customers, to the yieldco.
The customers are usually entities that deliver power to end users, such as utility companies or government agencies. The parent company gets sales proceeds to invest into other growth projects while the yieldco will collect a steady revenue stream from customers, guaranteed by the long-term contracts.
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