The renewable energy market is on pace to grow by an average of 15% per year over the next decade. Powering that surge is the dramatic decline in costs as the industry increases its scale and technology advances. That bright future could power market-crushing total returns for investors in renewable energy stocks in the coming years.
One of the best ways to play this megatrend is to build a mini-portfolio of the top companies focused on the sector. For example, those with $10,000 to invest could spread it across five stocks, making $2,000 investments in each company. Five top options for a renewable energy basket are Brookfield Renewable (BEP 0.47%) (BEPC -0.17%), Clearway Energy (CWEN 0.82%) (CWEN.A 0.88%), First Solar (FSLR 2.08%), NextEra Energy (NEE -0.39%), and Xcel Energy (XEL -0.96%).
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Switching its growth engine from hydro to solar power
Brookfield Renewable is one of the global leaders in hydroelectric electricity, but the company believes that a majority of its production capacity could be solar energy within the next decade. That's not because it doesn't believe in hydro or wind, but due to the outsize growth and returns it foresees for solar.
Overall, Brookfield Renewable estimates that it can expand its cash flow at a double-digit pace through at least 2025, powered in part by a growing backlog of high-return solar development projects. That should enable it to increase its nearly 3%-yielding dividend at a 5% to 9% annual pace, which could give it the power to produce market-beating total returns.
Increasingly visible power sources
Clearway Energy had a monster year in 2020, and its cash flow is on track to grow by more than 20%. Because of that and the recent reemergence of a key customer from bankruptcy, Clearway boosted its dividend three times and by 59% overall in 2020.
It sees more high-powered dividend growth ahead in 2021, increasing the payout toward the upper end of its 5% to 8% annual target range. Meanwhile, it has secured several needle-moving investments in 2020, including a co-investment on a large-scale portfolio of renewable energy projects that should come on line over the next two years. Because of that, it should be able to continue generating strong total returns.
Well positioned for the acceleration
First Solar is a leader in developing thin-film solar panels that are ideal for utility-scale projects. While it has invested heavily to expand its production capacity, it has already sold out much of it for the next few years, giving it lots of visibility into future revenue. Meanwhile, it has one of the best balance sheets in the sector, featuring $1.4 billion in net cash. That provides it with the financial flexibility to continue expanding its manufacturing base and develop new products to stay ahead of its competitors.
With average annual solar energy installations on track to grow twice as fast in the 2023-to-2030 time frame as they have in recent years, First Solar has lots of growth ahead.
Solid growth with intriguing optionality
NextEra Energy is the global leader in producing power from the wind and sun. As impressive as that is, the utility currently has more renewable energy projects in its backlog than its entire existing portfolio. Because of that, it expects to grow its earnings at a healthy pace over the next several years: by an anticipated 6% to 8% annually through at least 2023.
Meanwhile, in addition to its leadership in tried-and-true renewable energy technologies like wind and solar, it's also on the cutting edge of emerging trends like battery storage and green hydrogen. Because of that, NextEra should have plenty of power to continue generating market-beating total returns.
An ambitious target
Xcel Energy has a bold goal: to deliver 100% carbon-free electricity by 2050. The Midwest-focused utility aims to do that by retiring its legacy coal power plants and replacing them with wind and solar. It's also investing in emerging technologies like hydrogen in hopes of finding the carbon-free fuel sources needed to achieve its ambitious plan.
The company believes that its transition will pay big dividends for investors. Overall, it estimates its earnings per share and dividend will grow at a 5% to 7% compound annual rate over the next several years. Add in its current 2.5% yield, and it could generate total returns approaching double digits, which isn't bad for a low-risk utility.
A portfolio positioned for the energy transition
Renewable energy appears poised to shine over the next several decades as the global economy pivots toward cleaner fuel sources. While many companies will benefit from this transition, few are in a better position than Brookfield Renewable, Clearway Energy, First Solar, NextEra Energy, and Xcel Energy. Because of that, they make an excellent group of stocks to buy and hold for the long haul.
