It can be tough to pick winners in the energy sector: So much about a company's fate can depend on regulation, government policy, and commodity prices. But it's a sector that can offer both growth and value, as well as adding diversity to investors' portfolios.
NextEra Energy (NEE +0.65%), Valero Energy (VLO +2.88%), and Clearway Energy (CWEN 0.62%) all have good prospects for share price gains from today's levels, and offer dividends that at current prices yield between 2% and 8%. Those dividends mean investors can get paid without having to worry about trying to time market cycles.
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Reliability and renewables
NextEra is a Florida-based company that owns Florida Power & Light, the largest regulated electric utility in the U.S. by retail megawatt-hour sales, as well as Gulf Power, which serves the northwestern part of the state. Its other subsidiary is NextEra Energy Resources, which, along with its affiliates, is the world's largest generator of wind and solar power.
This renewable energy segment differentiates NextEra from other utilities, and is the driving force behind recently raised growth expectations. Management has said earnings for 2021 will be higher than their previous guidance, and extended its 6% to 8% annual growth expectations through 2023.
In addition to growth supported by renewable generation, its electric utilities provide stability for dividend payouts. The dividend yield is a modest 2%, but this is partly because of its share price gains in recent years.
As the above chart shows, the company has continued to increase its payout to shareholders. Management also recently announced its shares will undergo a four-for-one split. While that doesn't mean anything either for the fundamentals of the business or its future results, it does highlight the previous share price gains.
With earnings growth expected to continue, shareholders can pocket their dividends while anticipating the share price will track the business's gains over time.
Not just a refiner
As one of the world's largest independent oil refiners, Valero Energy is dependent more on refining margins than the specific price of crude oil. But they are interrelated, and consumer demand ultimately is a major driver of both. The pandemic continues to cut into the global need for oil, and the International Energy Agency (IEA) recently lowered demand expectations even further for the remainder of 2020.
Longer-term shareholders in Valero have watched the stock price sink in response to negative news this year. But that growing dividend would offer investors who buy now a nearly 8% yield to enjoy as they wait for a recovery.
The company is also working to diversify. Its petroleum refineries contributed 96% of revenue in 2019. But it also owns 14 ethanol plants and operates Diamond Green Diesel, North America's largest renewable diesel plant, in a joint venture with Darling Ingredients (DAR +3.29%). Though those are currently small parts of Valero, revenue from its growing renewable diesel segment increased by 80% year over year in 2019.
A recent catalyst
Clearway Energy owns and operates a portfolio of clean-energy generating installations, and sells its electricity to power utilities under long-term contracts. One of its biggest customers is California-based PG&E (PCG 0.11%), and that connection sent Clearway stock downward when the utility entered bankruptcy protection early in 2019. During the restructuring process, Clearway was unable to access almost $168 million in cash it was owed from its supply contract with PG&E.
The uncertainty caused Clearway to slash its dividend, and shares dropped. With that key customer now out of bankruptcy protection, Clearway was able to restore its dividend to almost its pre-cut level with a 49% increase for 2020's third quarter.
"With the emergence of PG&E from bankruptcy, Clearway's impacted projects are now able to distribute cash in the normal course," said President and CEO Christopher Sotos in the second-quarter earnings release.
The resolution of the PG&E situation will allow investors to focus on Clearway's growth strategy while collecting a generous level of income through what should continue to be an increasing dividend that currently yields 3.6%. The company has targeted an annual dividend growth rate of between 5% and 8%, and it can now focus on supporting those payouts with increased investments in green-energy projects.
3 ways to play
All three of these energy stocks have growth prospects from current levels, and each has a hand in the growing renewable energy segment.
Their growth won't necessarily go in a straight line, but these companies regardless of their business cycles, investors who buy these stocks now should get paid a nice return while their plans develop.
