As one of the hottest sectors last year, renewable energy stocks helped to supercharge many portfolios in 2020. With investors recognizing how green energy solutions are occupying an increasingly prominent position in our energy landscape, the iShares Global Clean Energy ETF soared more than 140% last year, while the S&P 500 climbed 16%. In 2021, however, the trajectory has reversed course as the iShares Global Clean Energy ETF has dipped more than 16% year to date.
Does the market's waning appetite in 2021 suggest that investors should eschew renewable energy stocks and turn toward more conventional energy plays like oil and gas? Not at all. There are still plenty of reasons to believe that renewable energy stocks belong in investors' portfolios.
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1. Green energy is a great growth opportunity
While it's unlikely that wind turbines are popping up around your neighborhood, it's probable that solar panels have become increasingly common sights on your neighbors' rooftops. Even more likely than that, perhaps, is pulling up next to a Tesla or hybrid electric vehicle (EV) at a red light.
And if you're not seeing signs of clean energy adoption in your neck of the woods, just wait. The future is poised to become increasingly green. A recent report from the Solar Energy Industries Association and Wood Mackenzie, for example, forecasts that in the United States alone 324 gigawatts (GW) of solar power capacity will be installed over the next 10 years, representing three times the amount installed through 2020.
And it's not only stateside where renewables are poised to grow in demand. According to a late-2020 report from the International Energy Association, renewable energy sources "are set to account for 95% of the net increase in global power capacity through 2025." Consequently, growth investors would be well-served to consider solar energy leaders like Enphase Energy (ENPH 3.80%) and SolarEdge Technologies (SEDG 2.81%). Two of the largest solar-stocks as measured by market cap -- Enphase at $21 billion and SolarEdge at $14 billion -- have both succeeded at consistently growing revenue and cash from operations over the past three years, a feat that many solar companies haven't achieved.
ENPH Revenue (Annual) data by YCharts.
2. Charge up your passive income stream
Whether you're retired and looking to supplement your Social Security benefits or you're simply enthusiastic about getting paid to do nothing, investing in dividend-paying stocks provides an excellent opportunity to build wealth. Although there aren't as many choices as growth stocks, there are a number of opportunities for investors to power their portfolios with passive income from renewable energy stocks.
Brookfield Renewable Partners (BEP 0.19%), for example, currently represents an electric opportunity, providing unitholders with a 3.04% forward yield. In the renewable energy sector, Brookfield Renewable is a powerhouse. The company's global portfolio represents an operating capacity of 20 GW and covers a wide swath of green energy assets, including solar, wind, energy storage, hydroelectric, and distributed generation.
Moreover, the company has a development pipeline representing 23 GW of operating capacity, which suggests that there's plenty of growth on the horizon -- something which helps support management's target of growing its distribution 5% to 9% annually. While the company's previous success doesn't guarantee it will achieve the same thing in the future, it's worthwhile to note that since its inception in 1999, the company has increased distributions at a compound annual growth rate of 6%, suggesting that its reasonable to expect the company will achieve its 5% to 9% annual distribution growth target.
3. This investment environment is a green light for growth
Looking at the current economic and political environment, investors will find that there are macro forces at play, suggesting that clean energy stocks may be poised to prosper. As interest rates remain low, renewable energy companies, which frequently look to the debt markets to finance their growth plans, are able to take advantage of more favorable financing terms and pursue ambitious growth projects. Alternatively, the low interest rates afford some companies the opportunity to improve their financial health. Brookfield Renewable, for example, stated the following in its recent fourth-quarter 2020 letter to shareholders:
"During 2020, we continued to take advantage of the low interest environment and executed on $3.4 billion of investment grade financings, extending our average corporate debt maturity to 14 years and reducing our borrowing costs by $5 million per year."
In addition to low interest rates, the current enthusiasm for renewable energy among politicians represents another reason why green energy stocks may be poised to prosper. President Biden's decision to rejoin the Paris Agreement was heralded by renewable energy advocates, and as cities and states strive to reduce their carbon footprints, it's likely that renewable energy companies -- and their stocks -- will benefit.
The power-packed recap
Maybe it's the recognition that global demand for renewable energy solutions continues to grow, maybe it's the desire for passive income stream, or maybe it's the desire to lower the amount of risk in one's portfolio. Or maybe it's all three. Whereas renewable energy stocks at one time mostly represented extremely speculative investments, these days there are green power stocks that are a lot more mainstream, affording investors of all ilks an opportunity to grow wealth with the help of the sun, wind, water, or all of the above.
