Renewable energy is a massive, multi-decade megatrend. Current estimates suggest that the global economy will require $100 trillion of investments over the next 30 years to switch power sources from fossil fuels to cleaner alternatives. Given the size and duration of this opportunity, investors won't want to miss out.
Thankfully, they have a lot of ways to play the energy transition trend. Here's a look at three ways to invest in renewable energy.
The renewable energy yieldcos
Companies focused on developing new renewable energy generating capacity need lots of cash to continue investing in new projects. They can bring in new capital by selling the cash-flowing renewable energy assets they develop to renewable yieldcos. These companies focus on owning renewable energy production facilities that sell the bulk of their power under long-term, fixed-rate power purchase agreements (PPA) to end-users like large commercial customers or electric utilities. That gives them the cash flow to pay high dividend yields.
Two examples of renewable yieldcos are Clearway Energy (NYSE:CWEN)(NYSE:CWEN.A) and NextEra Energy Partners (NYSE:NEP). Clearway typically acquires recently completed wind and solar energy projects from its privately held sponsor Clearway Energy Group. Meanwhile, NextEra Energy Partners does the same from its parent, utility giant NextEra Energy (NYSE:NEE).
Given their focus on dividends, they pay above-average yields (Clearway's payout is 4.8% while NextEra Energy Partners' dividend yields 3.4%). Further, their primary objective is to steadily increase those payouts. For example, Clearway targets 5% to 8% annual dividend growth while NextEra Energy Partners aims for 12% to 15% yearly increases. These factors make them ideal options for income-seeking investors.
Renewable energy component makers
Several companies focus on making equipment and components for the renewable energy industry, including:
- Panels, ground-mounting systems, inverters, and optimizers for producing solar energy.
- Turbines, blades, and internal components for wind energy.
- Batteries, uninterruptible power systems (UPS), power trains, and charging stations for battery storage and electric vehicles (EVs).
Renewable energy component makers sell more of their products as the industry expands. That enables them to grow their revenue and earnings quickly as they scale their business in this expanding marketplace.
Many companies focus on making these components. A notable example is SolarEdge Technologies (NASDAQ:SEDG). While it specializes in making an optimized inverter system to maximize the power produced by solar panels, it also provides solutions to a broad range of other energy segments. These include storage, EV charging, batteries, UPS, vehicle powertrains, and grid services. Companies like SolarEdge are ideal for those seeking a high upside investment.
Utilities cleaning up their act
Utilities are another way to play the renewable energy megatrend. Most are investing heavily to build new renewable energy capacity to replace fossil fuel power plants. On top of that, they're investing in building out the grid to support additional renewable energy capacity.
One of the leaders in this space is NextEra Energy. It operates two utilities in Florida, one of the largest renewable power generating businesses, and a leading electricity transmission company. It's investing billions of dollars in expanding these businesses. NextEra anticipates that its investments will help grow its earnings per share at a 6% to 8% annual rate through at least 2023. Meanwhile, it expects to grow its 2% dividend by around a 10% yearly rate through next year. That combination of yield and growth makes utilities like NextEra Energy lower-risk investments.
Multiple ways to play this megatrend
Investors have lots of renewable energy investment options. They can generate a growing income stream by investing in a yieldco or a utility. Or they can opt for a higher risk/higher reward opportunity by investing in a component maker, which could generate strong revenue and profit growth in the coming years. Given the sector's overall appeal, investors should look for a way to add some renewable energy stocks to their portfolio.