Passive income is a powerful tool for building wealth, as it allows individuals to earn money with relatively little effort. One effective way to generate passive income is by investing in dividend-paying stocks, particularly those that offer high yields and have the potential for growth. In this article, we’ll explore two companies—Energy Transfer (NYSE: ET) and Clearway Energy (NYSE: CWEN, CWEN.A)—that currently offer dividend yields above 6%. These companies not only provide attractive income opportunities but also have strong growth prospects, making them excellent choices for investors seeking to boost their passive income streams.
### The Allure of High-Yield Dividend Stocks
Dividend stocks are a popular choice for income-focused investors because they provide regular cash payouts, which can be reinvested or used to cover living expenses. Historically, the S&P 500 has offered an average dividend yield of around 1.2%, providing modest income for investors. However, for those looking to generate more significant passive income, high-yield dividend stocks are a much better option. Energy Transfer and Clearway Energy are prime examples of companies that offer yields well above the market average, with payouts of 6.2% and 6.5%, respectively.
For instance, if an investor were to put $100 into Energy Transfer, they would receive $6.20 in annual passive income compared to just $1.20 from an S&P 500 index fund. This significant difference in yield can make a substantial impact over time, especially for those looking to build a steady income stream. Moreover, both companies have demonstrated their ability to maintain and grow their dividends, making them attractive options for long-term investors.
### Energy Transfer: A Rock-Solid Dividend with Growth Potential
Energy Transfer is a master limited partnership (MLP) that operates in the energy midstream sector, providing critical infrastructure for the transportation, storage, and distribution of energy products. The company’s high dividend yield of 6.2% is supported by stable cash flows, primarily generated from fee-based contracts. Approximately 90% of its earnings come from these predictable agreements, which reduces its exposure to volatile energy prices and provides a solid foundation for its payouts.
In addition to its stable cash flow, Energy Transfer maintains a conservative payout ratio of just over 50% of its free cash flow. This means that the company retains a significant portion of its earnings to reinvest in growth initiatives or strengthen its financial position. Its leverage ratio is also heading toward the lower end of its target range of 4 to 4.5 times, further enhancing its financial stability.
Energy Transfer’s growth prospects are equally impressive. The company has allocated $2.5 billion to $3.5 billion annually for growth capital spending, with several major projects underway. One of its most notable ventures is the $2.7 billion Hugh Brinson Pipeline, which is expected to contribute to its cash flow and earnings through 2024. Additionally, Energy Transfer is progressing on the long-delayed Lake Charles LNG project, which could provide further growth opportunities in the future.
The company has also demonstrated an ability to make accretive acquisitions, such as its purchase of WTG Midstream last year. This deal is expected to add $0.04 per unit to its distributable cash flow this year, increasing to $0.07 per unit by 2027. Energy Transfer’s disciplined approach to acquisitions and investments positions it well for sustained growth and dividend increases in the years to come.
### Clearway Energy: Leveraging Renewable Energy for Dividend Growth
Clearway Energy, on the other hand, is a clean energy infrastructure company that specializes in renewable energy and natural gas power generation. The company currently offers a dividend yield of 6.5%, which is supported by stable cash flows from its long-term, fixed-rate power purchase agreements. By selling electricity to utilities and corporate customers under these agreements, Clearway Energy ensures a predictable income stream that underpins its dividend payments.
Over the past few years, Clearway Energy has focused on recycling capital from the sale of its thermal business into new renewable energy investments. This strategy has paid off, as the company has steadily grown its cash flow through a series of new investments. Looking ahead, Clearway Energy has lined up additional deals that are expected to drive further growth in both its cash flow and dividend payouts. The company is targeting a dividend growth rate of 6.8% for this year and 6.5% in 2026, with plans to continue increasing its dividend beyond 2027.
Clearway Energy’s commitment to renewable energy positions it well in an industry experiencing rapid growth. The global demand for clean energy is on the rise, driven by increasing environmental awareness and regulatory support for renewable projects. With its strong balance sheet and flexible capital structure, the company is well-equipped to take advantage of these opportunities by investing in new renewable energy projects and acquiring existing assets. Clearway Energy aims to achieve annual dividend growth of 5% to 8% while maintaining a targeted payout ratio of 70% to 80% and a manageable level of leverage.
### The Benefits of Investing in MLPs and Renewable Energy
Investing in MLPs like Energy Transfer comes with some unique considerations, particularly regarding taxes. MLPs issue Schedule K-1 tax forms to their investors, which can be more complex to manage than the standard Form 1099 issued by traditional corporations. However, the higher yields and growth potential of MLPs often make this trade-off worthwhile for income-focused investors.
Similarly, investing in renewable energy companies like Clearway Energy offers the added benefit of aligning with a growing industry that is playing a crucial role in the global transition to cleaner energy. As governments and corporations continue to prioritize sustainability, companies in the renewable energy sector are well-positioned for long-term growth.
### Final Thoughts: Balancing Income and Growth
Energy Transfer and Clearway Energy represent two excellent opportunities for investors seeking high-yield dividend stocks with growth potential. Their strong financial foundations, stable cash flows, and clearly defined growth strategies make them stand out in their respective industries. For those comfortable with the unique characteristics of MLPs, Energy Transfer offers a compelling combination of a high dividend yield and annual distribution growth. Meanwhile, Clearway Energy provides a similar income proposition while aligning with the growing demand for renewable energy.
Before making any investment, it’s important to do your own research and consider your personal financial goals and risk tolerance. Additionally, it’s worth exploring other top dividend stocks and growth opportunities, as diversification is key to building a resilient investment portfolio. Whether you choose to invest in Energy Transfer, Clearway Energy, or other high-yield dividend stocks, the potential to generate significant passive income is well within reach.
