Solar energy stocks were blistering hot last year. The Invesco Solar ETF -- an exchange-traded fund that holds 37 solar-focused companies -- soared more than 230% in 2020. Powering that surge was increased investor enthusiasm in the sector as costs come down and the global economy pivots toward renewable energy.
Given last year's run, it wouldn't be too surprising to see solar stocks cool off in 2021. However, the sector has such a bright future that investors should look at sell-offs as potential long-term buying opportunities. Topping my list as the best solar stock for 2021 and beyond -- and one I'd buy on a big dip -- is Brookfield Renewable (BEP -1.13%) (BEPC 0.03%).
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Betting big on solar energy
Brookfield Renewable is relatively new to the solar sector. It made its first foray in 2017 when it invested in TerraForm Power and TerraForm Global. It has since grown its solar business to about 9% of its cash flow, with the rest coming from hydroelectric (64%) and wind power (27%).
The company has been steadily building its solar platform via a series of acquisitions. Its latest purchase is the solar business of utility Exelon (EXC 0.96%). The company and its institutional partners are paying $810 million to acquire 360 megawatts (MW) of distributed solar (i.e., rooftop and community systems) across 600 U.S. sites. In addition to that operating portfolio, Brookfield gets a pipeline of more than 700 MW of projects under development.
The operating portfolio will provide incremental cash flow to support Brookfield's current dividend, while the development assets bolster its growth prospects. The acquisition also enhances the company's position as one of the largest owner-operators of distributed generation assets in the U.S. at about 2,000 MW. That increased scale will enable the company to generate more cash and higher returns from the overall portfolio because it can leverage its size to reduce costs.
High-powered growth ahead
That transaction builds on Brookfield's already extensive solar project backlog. The company had 18.3 gigawatts (GW) of renewable energy projects in development, nearly as large as its existing 19.4 GW operating portfolio. More than half of those development projects are solar, which is noteworthy given the returns Brookfield expects to earn from those investments.
The company pointed out that one project -- a 1.2 GW development in Brazil that it acquired last year -- should achieve about 20% returns on its investment. That's impressive given its size as one of the world's largest solar development projects. Brookfield believes it can produce such robust returns because of its scale, which should drive down equipment procurement, installation, and operating costs for this project.
That project is just one example of what Brookfield sees ahead for its solar business. Because the returns are so good thanks to its increasing scale and the rapidly declining costs of solar panels and other components, Brookfield believes solar could be its biggest business within the decade.
While the company already has a large-scale solar energy operating portfolio and an extensive development pipeline, that likely won't stop it from continuing to expand its solar business this year via additional acquisitions. The company expects to invest up to $1 billion per year on new investments, with solar likely a key focus area. It has a top-notch balance sheet that gives it the financial flexibility to pursue additional solar energy sector opportunities, including $3.4 billion of available liquidity to make deals. Future solar acquisitions will most likely follow a similar blueprint to the Exelon deal by coming with a development pipeline, allowing it to leverage its scale to enhance the returns.
One of the best ways to invest in solar energy
Brookfield Renewable has focused a lot of attention on building out its solar energy portfolio over the last few years. These investments should continue to pay dividends in 2021 and beyond by providing it with a fast-rising cash flow stream so that it can keep boosting its dividend. That highly visible upside is why it tops my list as the best solar stock for this year and those to come.
