This past year has been an excellent one for investors. The S&P 500 was on fire, rallying more than 30%. Meanwhile, some segments of the market were even hotter. Solar stocks, for example, surged a blistering 66% as measured by the Invesco Solar ETF, an exchange-traded fund that holds 22 of the biggest solar stocks.
Because of that, investors might be having trouble finding compelling renewable energy stocks to buy since the market is getting a bit rich. However, there are still some compelling ones, especially for investors who like income. That's because several renewable yieldcos offer an appealing combination of yield and growth. The three best ones to buy for 2020 are Clearway Energy (CWEN 0.47%) (CWEN.A 0.71%), NextEra Energy Partners (NEP 0.73%), and TerraForm Power (TERP).
Held down by a problematic customer
Clearway Energy battled through a challenging year in 2019. The company initially expected that it would be able to increase its dividend by another 5% to 8% in 2019, powered by its growing portfolio of cash-flowing renewable energy assets. However, the company had to modify its expectations when one of its key customers -- California-based utility Pacific Gas & Electric (PCG) -- filed for bankruptcy protection. The company responded to that move by slashing its dividend nearly 40% -- pushing the yield down to its current level of 4% -- while also electing to forgo some growth-focused investments to beef up its financial profile.
Those moves initially weighed on Clearway's stock. However, it went on to bounce back thanks to its solid operating results and the progress of PG&E's bankruptcy proceedings. Because of that, the company's shares rose by 16% in 2019. Add in its high-yielding dividend, and the wind and solar power producer's total return approached 22%.
Clearway Energy appears well-positioned to generate strong total returns once again in 2020. Thanks to its growth-focused initiatives, it's on track to produce $295 million in cash available for distribution (CAFD) in 2020, which would be about 18% above 2019's level. Add that healthy growth rate to the company's high-yielding dividend, and it could generate a double-digit total return for its investors. Meanwhile, there's further upside potential if PG&E emerges from its bankruptcy process without altering its contracts with Clearway Energy.
Plenty of fuel to continue growing in 2020
NextEra Energy Partners also felt some impact from PG&E's bankruptcy in 2019. However, instead of cutting its payout or slowing its growth rate, the clean energy-focused company made a couple of acquisitions to ensure it had enough power to support its dividend growth plan. Overall, the company completed two notable deals in 2019, buying several renewable energy assets from its parent, NextEra Energy (NEE 0.26%), and purchasing a natural gas pipeline.
As a result of those transactions, NextEra Energy Partners was able to boost its dividend by 15% in 2019, increasing the yield to its current level of 4%. That helped drive its stock up nearly 22% on the year, pushing the total return to almost 27%.
Thanks to those acquisitions, NextEra Energy Partners has enough CAFD to grow its dividend by another 12% to 15% in 2020. The company, however, will likely continue making deals in 2020 since NextEra Energy has a large inventory of clean energy assets that it could sell to its affiliate.
In addition to that acquisition-powered growth, NextEra Energy Partners has another potential catalyst on the horizon in the likely resolution of PG&E's bankruptcy. Those proceedings are holding up the cash distributions from some of its projects. Assuming no changes in their contracts, NextEra would have an additional $55 million in CAFD (about a 10% increase) that it could use toward growing its dividend. Add that potential catalyst to this fast-rising payout, and this company could continue generating high-powered total returns in 2020.
Starting to hit its stride
TerraForm Power produced strong total returns in 2019. Overall, shares of the wind and solar company rallied more than 35%. Add in the dividend -- which currently yields 5.3% -- and the total return was almost 43%. However, as good as that was, the company was even hotter at one point last year, rallying more than 60% at its peak before giving back some gains.
One factor that seemed to weigh on TerraForm's stock was its decision to sell some shares and boost its financial profile. That gave it the cash to help finance the acquisition of some additional solar energy assets. The deal will immediately increase the company's cash flow per share while also bolstering its growth prospects.
TerraForm Power didn't need to make any acquisitions since it had enough embedded growth to increase its dividend by 5% to 8% per year through 2022. However, it took advantage of an opportunity to bolster its growth prospects. That trend could continue in 2020 since it's pursuing two notable investment themes. Add that potential upside catalyst to the company's attractive dividend, and it could continue generating strong total returns in 2020.
Plenty of power to continue producing
Renewable energy stocks thrived in 2019. While it will be tough for the sector to repeat its success in 2020, several stocks appear poised to continue generating strong returns. Clearway, NextEra Energy Partners, and TerraForm Power stand out because all three pay high-yielding dividends and have potential needle-moving catalysts that could boost their cash flow in the coming year. Those factors could enable these companies to produce double-digit total returns in 2020, making them excellent renewable energy stocks to buy for the coming year.