Solar energy was one of the biggest growth stories of 2020. The Invesco Solar ETF (TAN -0.23%) returned roughly 14 times more than the market last year. Wind energy also shows promise. And there remains value in oil and gas stocks, which have rebounded nicely so far this year.
NextEra Energy (NEE -1.42%) is the largest U.S. utility by market capitalization. The majority of the company's earnings come from fossil-fuel-based sources, but it's investing heavily in renewables -- so much so that renewable capacity could eclipse its fossil-fuel capacity by 2024. Here's why NextEra could be the best energy stock for 2021.
Aggressive renewable investment
NextEra has ramped its spending considerably over the last few years in an effort to grow its renewable portfolio. The company is a leading U.S. utility operator, meaning it funds and manages projects. Its results and guidance show that the transition to renewables hasn't affected its bottom line. And in fact, it can continue to grow earnings at a steady clip while spending more money.
The company is investing heavily in wind energy, which accounts for the majority of its renewable backlog. It's expanding solar as well -- and not just in its renewable division. NextEra Energy has three segments: Florida Power & Light (FPL), Gulf Power, and NextEra Energy Resources (NEER). The first two combine for the largest utility presence in Florida. NEER is its clean energy segment and operates throughout the U.S. and Canada. FPL is mostly a natural gas-based utility. In 2019, 79% of FPL's 27.4 gigawatts (GW) of capacity came from natural gas, while 4%, or just 1.1 GW, came from solar. But FPL doubled its solar capacity in 2020.
NEER commissioned 5.75 GW of renewable capacity in 2020, which was double what it did in 2019. Between 2021 and 2024, NEER is expected to add 23 GW to 30 GW of renewable capacity. At year-end 2019, NEER had a total capacity of 21.9 GW, roughly 14.2 GW of wind, 2.6 GW of solar, 2.6 GW of nuclear, and 2.4 GW of oil and gas. 2020 additions bring NEER's renewable capacity to roughly 22.5 GW. Therefore, its expected capacity additions over the next four years would more than double its capacity as of year-end 2020 -- and that's just based on the low end of guidance.
Another advantage is that much of NextEra's business is regulated, which helps protect the company from short-term risks. This business model relates to its renewable business as well. As of year-end 2019, roughly 90% of NEER's assets were power generation facilities "with long-term power sales agreements for substantially all of their capacity and/or energy output." This predictability is one of the main reasons why NextEra has consistently grown and beaten its guidance, and why it can claim with confidence that it can grow future earnings at a certain pace.
Stable and growing dividend
NextEra Energy is not only a renewable energy stock, but a dividend stock as well. The company has increased its payout by 150% over the past 10 years, during which its stock price has increased nearly five-fold.
Looking ahead, it expects to grow its dividend at around 10% through at least 2022. This is all the more impressive given how NextEra is spending record amounts of money. NextEra investors have come to expect dividend raises seeing as the company is a Dividend Aristocrat, meaning it has increased its annual payout for over 25 consecutive years.
A balanced approach for investing in energy
NextEra has many elements that make it a great energy stock for 2021. It is currently the world's largest wind and solar operator. Heavy investment over the next few years should ensure it retains this position. Renewable energy will soon comprise the majority share of its assets, which should help NextEra generate steady profits for decades to come.
A major concern with other energy companies such as oil pipelines or utilities with only minor renewable exposure is that their seemingly stable earnings could have a limited lifespan without making sizable renewable investments. This is less of a concern for natural gas pipeline giants since natural gas should pair well with renewables. What makes NextEra unique is that it is investing in the renewable transition right now. And it's doing so in a way that should grow profit and its dividend.