In the last two decades, renewable energy has gone from a small player in energy to the preferred energy source around the world. According to the International Renewable Energy Agency, renewables now account for two-thirds of net new generating capacity added each year, and annual installations are up more than eightfold so far this century.
The opportunity for investors is a growing energy business that's disrupting fossil fuels in everything from electricity distribution to transportation. But the industry changes quickly, and dozens of companies have gone bankrupt even as the industry has grown. That's why steady companies like NextEra Energy Partners (NEP 4.77%), First Solar (FSLR 2.17%), and TerraForm Power (TERP) are my top renewable energy stocks today.
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NextEra Energy Partners
Financing renewable energy projects is arguably the most challenging part of the industry's growth today. To address that issue, yieldcos like NextEra Energy Partners were formed to acquire and own renewable energy assets long-term, paying out dividends to investors along the way. Think of it like an REIT for real estate, but without the same tax benefits.
Successful yieldcos need to have a stable sponsor, which NextEra Energy (NEE 1.36%) is for its namesake yieldco, and that sponsor needs to have a pool of assets to drop down to the yieldco to drive growth. NextEra Energy Partners has the perfect combination of stability and growth opportunities, and management has said it has visibility for 12% to 15% dividend growth through 2024, starting with the $2.14 annualized rate at the end of 2019.
NextEra Energy Partners may not have the highest dividend yield at 4.1%, but the growth projected through 2024 could leave the dividend yield at as high as 8.2% for buyers today.
First Solar
No solar manufacturer has been as financially successful as First Solar, and it's leveraged that success to have the best balance sheet in the industry. Management expects to have a net cash balance of $1.7 billion to $1.9 billion at the end of this year, and that's after investing about $1 billion in manufacturing upgrades over the last year and a half.
Before those upgrades began, First Solar was generating about $1 billion in operating cash annually, and it could get back to that level in the next few years once operations ramp up.
FSLR Cash from Operations (TTM) data by YCharts
Solar manufacturing can be an up and down business, but First Solar's balance sheet gives it the flexibility to invest in new technology or acquire a competitor. Size matters in renewable energy technology, and First Solar is one of the biggest players around.
TerraForm Power
Another great yieldco to own today is TerraForm Power. The company is controlled by Brookfield Asset Management, which has a long history of building value in renewable energy and has billions in projects to drop down to the yieldco.
The 4,066 megawatts (MW) of power generating capacity that TerraForm Power owns has a weighted average of 13 years left on contracts to sell electricity to utilities. It aims to keep pay 80% to 85% of cash that's available for distribution to shareholders as a dividend, keeping the rest to fund growth or pay down debt. That'll drive dividend growth at a sustainable rate of 5% to 8%.
TerraForm Power isn't going to be the most exciting stock or dividend to own, but its long contracts and assets will have value for decades and give it stability few energy companies have today. That's why I think it's a great renewable energy stock.
Playing it safe in renewable energy
These stocks aren't going to be huge winners for investors, because they aren't high-growth companies. But they are slow and steady winners in renewable energy, and that's what I think investors should be looking for in a topsy turvy energy industry.
