Renewable energy is a massive megatrend spanning decades. Current estimates suggest that the global economy will need 100,000 billion dollars in investments over the next 30 years to shift from fossil fuel energy sources to cleaner alternatives. Considering the scale and duration of this opportunity, investors won’t want to miss it.
Fortunately, there are plenty of ways they can play with the energy transition trend. Here are three ways to invest in renewable energy.
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The yield of renewable energies
Companies focused on developing new renewable energy production capacities need a lot of cash to keep investing in new projects. They can bring in new capital by selling the cash-generating renewable energy assets they develop to renewable yield. These companies focus on owning renewable power generation facilities that sell most of their electricity under long-term, fixed-rate power purchase agreements (PPAs) to end users such as as large commercial customers or electric utilities. This gives them the cash to pay dearly dividend yields.
Two examples of renewable yieldcos are Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A) and NextEra energy partners (NYSE: NEP). Clearway generally acquires wind turbines and solar energy projects of its private sponsor Clearway Energy Group. Meanwhile, NextEra Energy Partners is doing the same with its parent company, utility giant NextEra Energy (NYSE: NEE).
Given their focus on dividends, they pay above average returns (Clearway payout is 4.8% while NextEra Energy Partners dividend earns 3.4%). In addition, their main goal is to regularly increase these payments. For example, Clearway is aiming for 5-8% annual dividend growth while NextEra Energy Partners is targeting 12-15% annual dividend increase. These factors make them ideal options for investors looking for income.
Renewable energy component manufacturers
Several companies are focused on manufacturing equipment and components for the renewable energy industry, including:
- Panels, floor mounting systems, inverters and optimizers for solar power generation.
- Turbines, blades and internal components for wind power.
- Batteries, uninterruptible power systems (UPS), powertrains and charging stations for battery storage and electric vehicles (EVs).
Manufacturers of renewable energy components are selling more of their products as the industry expands. This allows them to rapidly increase their income and profit as they expand their business in this expanding market.
Many companies focus on manufacturing these components. A notable example is SolarEdge Technologies (NASDAQ: SEDG). Although it specializes in manufacturing an inverter system optimized to maximize the power produced by solar panels, it also provides solutions to a wide range of other energy segments. These include storage, recharging of electric vehicles, batteries, inverter, vehicle powertrains and grid services. Companies like SolarEdge are ideal for those looking for a high investment.
Utilities clean up their act
Utilities are another way to play the renewable energy megatrend. Most are investing heavily to build new renewable energy capacity to replace fossil fuel power plants. On top of that, they are investing in building the grid to support additional renewable energy capacity.
One of the leaders in this space is NextEra Energy. It operates two utilities in Florida, one of the largest renewable energy companies and a leading electric transmission company. It invests billions of dollars in expanding these businesses. NextEra predicts that its investments will help grow its earnings per share at an annual rate of 6% to 8% until at least 2023. At the same time, he plans to increase his dividend by 2% of around 10% per year until next year. This combination of return and growth makes utilities like NextEra Energy lower risk investments.
Several ways to play this megatrend
Investors have many options for investing in renewable energy. They can generate an increasing income stream by investing in a yield company or utility. Or they can opt for a higher risk / reward opportunity by investing in a component manufacturer, which could generate strong revenue and profit growth in the years to come. Given the overall appeal of the sector, investors should look for a way to add renewable energy stocks to their portfolios.
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Matthew DiLallo owns shares of Clearway Energy, Inc., NextEra Energy, NextEra Energy Partners and SolarEdge Technologies. The Motley Fool recommends NextEra Energy and SolarEdge Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.