The global economy is accelerating its efforts to diversify its energy sources. As a result of concerns about climate change, the world is shifting away from carbon-based fossil fuels and toward cleaner alternative energy sources. Global economic decarbonization will require an estimated investment of more than $100 trillion over the next three decades.
Renewable energy sources will be critical in this energy transition. Here’s a look at how to invest in the renewable energy industry in greater detail.
Investing in these environmentally conscious companies may also help you save money.
Over the long term, growing political and social acceptance of environmentalism bodes well for green businesses. In the short term, some have been pressured by a broader shift away from growth stocks toward value stocks, the possibility of further rate hikes, an uncertain outcome for the White House’s climate legislation, and cost inflation for developers.
Why should you invest in clean energy companies?
Renewable energy sources such as wind, solar, and hydroelectric now account for roughly a quarter of all electricity generated by the power sector. The industry has been expanding rapidly, adding approximately 8% annual capacity to its electricity generation capacity over the last decade. However, with growing concerns about climate change, the pace has accelerated in recent years. It must accelerate further in order to contribute to the decarbonization of the economy.
Climate change is compelling businesses and other institutions to consider how they can contribute to the decarbonization effort. Numerous businesses are entering into power purchase agreements (PPAs) with electric utilities and other electricity generators to purchase renewable energy. Others, on the other hand, are directly investing in renewable energy development projects. While many are doing so to become more socially responsible global citizens, renewable energy is becoming more affordable as the cost of solar panels, wind turbines, and energy storage batteries continues to fall. As a result, the sector has become a more attractive investment opportunity.
Governments are also accelerating global decarbonization by proposing and enacting legislation to boost investment in the sector. The US Senate approved a $1.2 trillion infrastructure package in August 2021, which includes funding to accelerate clean energy investment. Many view it as a down payment on the spending required to decarbonize the economy, with future legislation potentially increasing the country’s investment level further.
Five leading renewable energy stocks
Numerous businesses are focused on renewable energy, positioning them well to benefit from this investment megatrend. However, a select few energy companies stand out as the best renewable energy stocks to invest in. Among the leading green energy companies are the following:
Brookfield Renewable
Brookfield Renewables is a market leader in renewable energy on a global scale. It is one of the world’s largest hydroelectric power producers, accounting for more than 62% of its portfolio in 2021. Additionally, Brookfield has expanding expertise in wind (onshore and offshore), solar (utility-scale and distributed generation, such as rooftop solar), and energy storage. The company sells the majority of its power through long-term power purchase agreements that generate consistent cash flow.
Brookfield has a distinguished track record. Since inception, the company has averaged a 20% annualized total return. The steady expansion of its portfolio through acquisitions and development projects has been the engine of its growth. These two factors have increased Brookfield’s earnings at a compound annual rate of more than 10% over the last decade, resulting in a compound annual growth rate of 6% in dividend payments since 2012.
Brookfield anticipates further growth – up to 20% annually through 2025 – fueled by its enormous pipeline of renewable energy development projects and acquisitions. This should enable the firm to increase its dividend by 5% to 9% each year, so establishing it as one of the greatest renewable energy dividend stocks while keeping an excellent balance sheet.
Clearway Energy
Clearway Energy is one of the major renewable energy owners in the United States. It augments its portfolio of wind and solar energy assets with highly efficient natural gas power plants and district energy assets. Clearway also sells its power through PPAs, which provide the company with consistent cash flow.
Clearway has done an excellent job over the years of creating shareholder value, delivering annual total returns approaching 10% since its inception. Notably, since private equity firm Global Infrastructure Partners acquired the company in 2018, its total annualized returns have more than doubled. This partnership ensures a continual flow of investment prospects for the company.
Clearway’s capacity to grow its portfolio, cash flow, and dividend has been the catalyst for these fast gains. All three are expected to continue climbing, according to the business. It intends to boost its dividend by 5% to 8% annually over the next few years while maintaining a strong financial profile.
First Solar
First Solar is a thin-film solar panel developer and manufacturer. This larger-sized panel produces more useful energy than rival technology. This makes it excellent for solar energy projects on a large scale, such as utility-scale.
Since its initial public offering, the solar panel manufacturer has done an admirable job of building wealth for its shareholders, delivering a total annualized return of nearly 9.5 percent (IPO). As one of the world’s largest solar panel manufacturers, the firm is well positioned to increase shareholder value as solar panel demand increases. By 2025, capacity will have doubled from its level in 2020. Additionally, First Solar boasts one of the sector’s strongest financial sheets. Its net cash position was around $1.5 billion in 2021, providing it with sufficient financial flexibility to continue expanding.
NextEra Energy
NextEra Energy is the largest wind and solar energy generator in the world. It generates this energy through its Florida utilities and its energy resources sector, which sells electricity to other utilities and end customers under power purchase agreements.
NextEra’s track record of delivering shareholder value is exceptional. Over the last decade, it has generated a about 700 percent total return. Above-average growth has been the engine of the energy company’s high results. Since 2005, NextEra has increased adjusted profits per share at an annual compound rate of 8.7 percent while increasing its dividend at an annual compound rate of 9.6 percent. NextEra has grown its dividend for over 25 consecutive years, giving the company the designation of Dividend Aristocrat.
Through at least 2023, the business anticipates annual profits growth of 6% to 8%, fueled by sustained investments in renewable energy. This should enable them to maintain a 10% dividend growth rate at least through 2022 while maintaining one of the sector’s strongest balance sheets.
SolarEdge Technologies
SolarEdge Technologies designs and produces an inverter system that is optimized for efficiency. This component optimizes the amount of energy generated by solar panels, hence lowering the system’s energy cost.
Throughout its existence, SolarEdge has been an incredible value creator. Since its initial public offering, the solar company has returned nearly 50% on an annualized basis. That growth is being fueled by the company’s meteoric rise to become the market leader in solar inverter manufacturing by 2020, from tenth place in 2014.
SolarEdge Technologies, like First Solar, should benefit from the global solar energy industry’s rapid growth. Solar energy is expected to grow from 11% of the world’s installed capacity in 2019 to 38% by 2050, according to one forecast. SolarEdge should be able to continue growing its revenue and earnings at a healthy clip for years to come as a result of this increasing market share. Additionally, it has a strong balance sheet that will assist in financing its growth, with over $500 million in net cash in 2021.
The leading renewable energy stocks should provide investors with substantial returns.
Climate change and socially responsible investing have been significant drivers of the clean energy revolution. These factors will result in trillions of dollars of investment in renewable energy over the next several decades.
While a rising tide lifts all boats, the best renewable energy stocks should provide investors with some of the best returns. These green energy companies have already demonstrated their ability to create value and have the financial strength to capitalize on opportunities that are expected to generate outsized total returns over the next few years.