The energy industry has been turned on its head in the past decade, with coal dying, renewables growing, and electric vehicles becoming viable before our eyes. The result has been that former industry power players -- like big oil -- don't dominate like they once did.
With that in mind, investors need to look for energy companies that are ahead of the energy industry's changes. Yieldcos, solar, and energy storage are three areas I think investors can buy into right now.
The top energy yieldcos
Yieldcos are companies that buy renewable energy assets and then pay dividends to investors with the ongoing cash flow. Usually, the projects are backed by long-term power purchase agreements to sell electricity to utilities at predetermined prices. From a financial perspective, buying renewable projects is like purchasing a bond, which makes these stocks a lot safer than commodity-driven stocks like oil producers.
Three of the best yieldcos on the market today are NextEra Energy Partners (NEP 0.04%), Brookfield Renewable Partners (BEP -1.07%), and TerraForm Power (TERP). They have strong yields of 3.8%, 6.5%, and 7.1%, respectively, and a key advantage over competitors because they're controlled by financially sound sponsors. Specifically, NextEra Energy formed NextEra Energy Partners, and Brookfield Asset Management runs Brookfield Renewable Partners and now TerraForm Power. The sponsors are key because they keep a flow of projects going into the yieldco, which grows the yield over the long term, and they can ensure financing is available to make those acquisitions.
Wind, solar, and energy storage are the future of the electric industry and these three yieldcos will play a big role in building that future. That's a key advantage in today's energy industry.
Leaders in solar energy
Solar energy is the fastest-growing form of energy in the U.S., climbing from just 849 MW of installations in 2010 to 10,608 MW in 2017, according to GTM Research. As the most abundant form of energy on earth, solar has more potential to increase than the others.
Two companies leading the charge are SunPower (SPWR 0.63%) and Vivint Solar (VSLR). SunPower is one of the foremost solar manufacturers in the world, and makes the most efficient mass-produced solar panel called the X-Series. This superior product has given the company the No. 1 market share in commercial solar and one of the top spots in residential solar as well. As more businesses and homeowners go solar, SunPower should be one of the biggest beneficiaries in the U.S.
Vivint Solar is focused on residential solar projects, selling and building solar systems for thousands of people across the country. It has made an early transition to solar sales from an original model of financing leases and is benefiting from Tesla giving up its No. 1 position in the market. Residential solar has gone through its ups and downs over the years, but Vivint Solar remains one of the lowest-cost suppliers in the market and that should eventually drive profitability for the company.
What excites me most about SunPower and Vivint Solar is the opportunity they have to grow in energy storage, as they offer more and more solutions to customers. Both have introduced energy storage products, with SunPower developing its own and Vivint Solar partnering with Mercedes-Benz. I think energy storage will be a big growth market for the next decade, and these two are leaders in residential and commercial energy storage.
Energy is changing
It used to be that big oil and regulated utilities were the safe plays in energy. But the traditional energy industry is being upset by new technologies like wind, solar, and energy storage and investors shouldn't fight the trend -- they should instead go with it. I think Brookfield Renewable Partners, TerraForm Power, NextEra Energy Partners, Vivint Solar, and SunPower are all great buys in energy today. To back that up, I have an outperform call on MyCAPS page to track my picks, which you can follow here.