“Yield Co is a publicly traded company that is formed to own operating assets that produce a predictable cash flow. Separating volatile activities (e.g. R&D construction) from stable and less volatile cash flows of operating assets can lower the cost of capital. Yield cos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake.

Yield cos are commonly used in the energy industry, particularly in renewable energy to protect investors against regulatory changes. They serve the same purpose as master limited partnerships (MLPs) and real estate investment trusts (REITs), which most utilities can’t form due to regulatory constraints. Yield cos give investors a chance to participate in renewable energy without many of the risks associated with it.”

We have mentioned green bonds in prior articles and we will revisit the risk associated with those in further pieces but for now we would simply like to highlight a basic risk with regard to the equity avenue way to gain exposure to alternative energy.

Since yield cos return most of their investable cash to shareholders, most expected future dividend growth cannot come from re-investing earnings, as we would expect from traditional growth companies.  Hence, dividend growth will have to come either from issuing debt and using that to buy assets, or from buying assets (with debt or new equity) at low prices which make those assets significantly accretive to cash flow per share.

If debt is used to buy new assets, this will generally increase the dividend, but it will also increase overall risk to shareholders.  There is also a natural limit to debt, because there will come a point where lenders will become unwilling to provide additional funds.

The ability to provide healthy yields depends on additional asset purchases at a value and this is becoming more difficult in a tough space. We will in future articles identify those that provide some of the best risk to reward situations for investors.

Sincerely,

Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

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