For dividend investors, the allure of attractive and steady income streams is always a number one priority. In recent years, however, a new type of investment vehicle has emerged on Wall Street, promising to be the “next big thing” for dividend investors.
A few years ago, many alternative energy companies began separating divisions of their business to form “yieldcos.”
Yieldcos 101
Yieldcos are created when a parent company spins off its cash-generating operating assets. For renewable energy firms, these assets are typically connected to long-term contracts that provide steady and predictable cash flows.
The structure is advantageous because it protect the shareholders from other business operations in the renewable energy space that are typically more volatile – such as research and development and even construction. In addition, yieldcos are expected to payout a significant portion of its revenue stream to shareholders via dividends.
Essentially, yieldcos are like master limited partnerships, with some few key differences. MLPs are not subject to income tax, allowing them to defer taxes on 80% of MLP distributions. Yieldcos are not exempt from corporate tax, meaning they do not avoid double-taxation. Yieldcos are however able to “match” cash flows with losses that exceed taxable income, which results in a reduction of the company’s taxable income.
Because yieldcos are relatively new, there are several nuances in the structure and tax code that investors should be aware of. Currently, there is a proposal called The Master Limited Partnerships Parity Act, which would extend MLP’s tax break to renewable energy producers.
To learn more about MLPs, read Everything Dividend Investors Need to Know About MLPs.
Below are some of the yieldcos that are publicly traded:
Risky Investment or Promising Dividend Pick?
While there are a lot of attractive qualities about yieldcos, they are far from perfect or safe vehicles. The alternative energy industry is quite volatile, and even if the cash-generating contracts bundled into yieldcos are relatively safer, they are not without uncertainties. It will, however, be worthwhile to follow these new investment vehicles, especially if they adopt tax codes similar to MLPs.
As always, we encourage you to do your own research before making any investment decisions.
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