Oil stocks have generated handsome returns for millions of investors over decades. As an example, from 2001 to 2010, the Energy Select Sector SPDR ETF (NYSEMKT:XLE) generated a total return of 141% compared to the S&P 500 Index's total return of 15%. However, energy sector returns haven't been as impressive in the past decade. Between 2011 and 2020, the energy ETF generated negative total return of -23%, significantly underperforming the S&P 500 Index's return of 267%. Overall, over the two-decade time frame, oil stocks underperformed the broader market.
Though oil stocks still offer decent growth prospects, they might not replicate the kinds of returns that they generated in the past, in part due to challenges created by volatile oil prices and increasing use of renewable energy. So it would be prudent to look for energy stocks that have the potential to outperform oil stocks and the broader market. Let's check out three such stocks.
Brookfield Renewable Partners
If you have invested in oil stocks primarily for dividend income, fortunately, there are dividend-paying opportunities in the renewables space, too. Brookfield Renewable Partners (NYSE:BEP) (NYSE:BEPC) offers a dividend yield of a little over 3%. With a generation capacity of 21,000 megawatts, Brookfield Renewable is one of the world's top renewable energy companies. Moreover, it has around 31,000 megawatts of capacity under development.
From 2000 to 2020, Brookfield Renewable grew its distribution at a compound annual rate of 6%. In the long run, the company aims to generate total returns of 12% to 15% for its shareholders, including distribution increases.
Brookfield Renewable reported 5% year-over-year growth in its funds from operations in the latest quarter. It also continues to commit funds to growth projects and has invested or entered agreements to invest roughly $1.9 billion across a range of projects in the first half of this year. All in all, there is a lot to like about Brookfield Renewable Partners.
Atlantica Sustainable Infrastructure
Atlantica Sustainable Infrastructure (NASDAQ:AY) stock is trading at a dividend yield of nearly 4.5% as of this writing. The company generates more than 70% of its revenue from renewable power generation, with a focus on solar power.
Atlantica Sustainable generates most of its revenue from long-term contracted assets. For perspective, the average remaining contract life of its assets is 16 years. Such contracts lend relative stability to the company's cash flow.
Atlantica aims to grow its cash available for distribution by 5% to 8% through 2024 and plans to invest $300 million each year in growth projects in the medium term.
Atlantica Sustainable posted strong performance in the second quarter, with revenue growth of 47% year over year. In the first half of this year, the company grew its cash available for distribution by 12.9% over the same period in 2020. Overall, Atlantica Sustainable stock looks well placed to continue benefiting from the expected growth in renewables.
Microinverter supplier Enphase Energy (NASDAQ:ENPH) is a fast-growing company with good prospects. Enphase Energy reported revenue growth of 152% year over year in the second quarter. At the same time, it reported an impressive gross margin of 40.4% for the quarter.
Enphase Energy has recently been growing its revenue at a higher rate than rival SolarEdge Technologies.
Moreover, the company is generating a higher gross margin than SolarEdge. In the last five years, Enphase Energy's quarterly year-over-year revenue growth averaged 36%. For the third quarter, Enphase expects revenue in the range of $335 million to $355 million. At the midpoint, this guidance range implies 94% growth over the third quarter of 2020. It also expects a strong gross margin between 37% and 40% for the quarter.
In addition to microinverters, Enphase also profits from sales of power storage batteries. As the use of solar power increases, the demand for Enphase Energy's products should continue to grow. In short, Enphase Energy stock offers more attractive growth prospects than any oil stock right now.