Income-seeking investors must ask themselves whether these yieldcos are worth their premium valuations.
The investment thesis for these yieldcos is straightforward: The parent monetizes power-generating assets that operate under long-term contracts, selling them to the yieldco to drive dividend growth and price appreciation. This strategy provides the parent with access to low-cost capital to invest in additional growth projects.
If the Environmental Protection Agency’s proposal to reduce carbon dioxide (CO2) emissions from existing power plants survives political challenges, demand for new wind- and solar-power capacity would receive a significant bump. Modifications to these rules, on the other hand, could have the opposite effect. (Read our take in EPA’s Crackdown on CO2 Emissions: An Indecent Proposal?)