The renewable energy industry is still in the early stages of its growth. According to some estimates, companies could invest trillions of dollars in the coming years to transition the global economy from fossil fuels to renewables. This outlook suggests that companies focused on the sector have a bright future.
Three such companies are Atlantica Yield (AY -0.40%), Brookfield Renewable Partners (BEP 1.03%), and Xcel Energy (XEL -1.85%). Here's why they all look like excellent long-term buys right now, especially for investors seeking a lower-risk way to invest in renewables.
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A sustainable income stream
Atlantica Yield is a renewable yieldco. These are companies focused on generating stable cash flow from operating clean energy assets, the bulk of which they pay out to investors via a high-yielding dividend. Atlantica's payout currently yields 6.4%, which is more than three times that of the S&P 500.
Atlantica has a bit of a broader mandate than some of its peers, as it focuses on operating sustainable infrastructure assets. These include not only renewable energy generating facilities, but also those powered by cleaner-burning natural gas, as well as electricity transmission lines and water desalinization plants. The company sells the capacity of these assets under long-term, fee-based contracts, which enable it to generate predictable cash flow that it uses to pay its dividend.
What makes its payout even more attractive for investors is that Atlantica expects to increase it by an 8% to 10% compound annual rate through 2022. Powering its growth plan is the company's ability to invest in expanding its sustainable infrastructure portfolio. Over the past 12 months alone, it has committed to invest $320 million into several high-return opportunities.
These have included expanding its existing transmission lines in Peru, acquiring a gas plant in Mexico, and buying a utility-scale wind farm in Uruguay. These investments have the company well on track with its dividend-growth plan, making it an excellent income stock to consider buying for the long haul.
High-powered growth ahead
Brookfield Renewable Partners is also a renewable yieldco. It has a slightly different focus than Atlantica in that the majority of its portfolio consists of hydroelectric power-generating facilities, though it also owns wind, solar, and energy storage assets. The company sells the power these assets produce under long-term, fixed-price power contracts, enabling it to generate steady cash flow to support its 4.3%-yielding dividend.
Brookfield currently expects to grow that payout by 5% to 9% per year through 2024. Powering its plan is the company's efforts to increase the cash flow of its legacy assets, as well as build and buy additional renewable generating facilities. In the company's view, it can grow its cash flow by 9% to 16% annually over that time frame as it invests another $4 billion into expanding its renewable platform. That high-speed growth, when combined with its high-yielding dividend, puts Brookfield in the position to generate some compelling total annual returns.
A plan powered by renewables
Xcel Energy is a utility with operations focused mostly on the Midwest. At the moment, it gets the majority of its power from fossil fuels, as coal supplied 33% last year while natural gas contributed 29% against 13% from nuclear and just 22% from renewables.
That mix, however, will shift dramatically in the coming years. The utility has a bold plan to become carbon neutral by 2050. One of the key components of that shift is to make renewables a much larger portion of its energy mix, with it aiming to get 46% of its power from alternatives by 2027.
Xcel Energy believes that these investments should enable it to grow its earnings per share by 5% to 7% per year through at least 2024. That should allow it to increase its 2.6%-yielding dividend at a similar yearly pace. This forecast could support total annual returns in the 8% to 10% range, which sets it up to potentially outperform the S&P 500. That's something it has done by a wide margin over the last decade.
Healthy renewable returns with less risk
Atlantica Yield, Brookfield Renewable, and Xcel Energy are focusing on the lower risk side of the renewable sector by operating cash-flow generating assets. That approach will give them the funds to invest in expanding their portfolios so that they can keep increasing their above-average dividends. That should enable them to generate market-beating returns with less risk, which makes them excellent renewable energy stocks to buy right now with the long term in mind.
