An often underappreciated part of the renewable energy industry is the role financing and owning renewable energy assets has on the industry. Without low-cost financing, renewable energy wouldn't be competitive with fossil fuels because projects need to be financed over decades to justify the upfront cost.
That's opened up a multibillion-dollar industry for finance companies and utilities that are snapping up renewable energy projects around the world. Given how quickly the industry is growing, three Fool.com contributors think Hannon Armstrong (HASI +3.73%), NextEra Energy (NEE +3.94%), and Dominion Energy (D +3.20%) are top renewable energy dividend stocks today.
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A diverse renewable energy dividend
Travis Hoium (Hannon Armstrong): There are a number of ways to generate yield in renewable energy, like owning electricity-generating assets, owning land under projects, or even financing efficiency upgrades. What I like about Hannon Armstrong is that it is involved in any renewable energy market where it can make a predictable rate of return. This allows management to shift investment to areas with the highest return relative to risk.
Management expects to increase the distributable earnings per share from $1.55 in 2020 to between $1.90 and $2.06 by 2023, a compound annual growth rate of 7% to 10%. And the dividend is expected to grow to between $1.49 and $1.57 over the same time frame, which is a yield of 2.6% at the midpoint based on today's share price.
As the market for renewable energy assets gets more competitive, I think companies with the ability to invest in a diverse group of assets will be more valuable. Hannon Armstrong has been able to find unique, investable assets, and that's helping its business grow. In 2016, the company's portfolio yield was 6.2% with distributable return on equity of 10.1%. In 2020, portfolio yield was up to 7.6%, and distributable return on equity was 10.7% even while interest rates have been falling. This shows management's ability to execute on improving returns as the company grows. That's why this is a top dividend stock in renewable energy today.
Stability when you need it
Howard Smith (NextEra Energy): Many people fear severe market downturns because gains previously made on paper can evaporate quickly. In reality, investors who put themselves in a position to take advantage of stock declines are helping to set up their portfolios for outsize gains upon a recovery. Being in that position not only requires having investable cash available at the right time, but also the mental fortitude to put it to work when others are panicking. That's easier said than done when headlines scream about falling equity values.
Many renewable energy names are aggressive -- or even speculative -- investments in alternative energy and developing technologies. But NextEra Energy has interests in a mix of renewable energy assets in addition to being the parent of traditional utilities Florida Power & Light and Gulf Power. Those utilities make NextEra Energy the largest U.S. integrated utility as measured by retail megawatt-hour sales.
Companies focused on renewables, including solar, wind, hydrogen, or other alternative sources, will typically respond as aggressive investments normally do in a downturn -- with above-average volatility leading to declines that may make owners especially nervous. But while NextEra gives investors the positive side of growth that aggressive investments provide, its regulated utilities should furnish investors' ballast in the storm of a market crash.
For that, investors have to accept a dividend yield that is slightly lower than what many expect from a utility. At its recent share price, NextEra's dividend represents a 1.84% yield. But an investment in NextEra comes with the advantage of a renewables segment that should spark above-average growth over the long term and allow investors to feel more secure and ready to find promising investment opportunities when the market corrects.
The stability allows NextEra management to expect dividend per-share growth of approximately 10% at least through next year. And the growing renewables segment helps them confidently tell investors they "will be disappointed" if financial results don't come "at or near the top end" of the expected range of adjusted earnings-per-share growth of between 6% and 8% through at least 2023. That balance is what can help investors feel more secure in weathering the next market crash.
A balanced utility that's on the upswing
Daniel Foelber (Dominion Energy): I agree with Howard that NextEra Energy is a top-tier renewable energy stock that can thrive well into the future. As an investment, its combination of stable earnings growth, an industry-leading portfolio, and dividend increases is a unique and attractive offering.
A similar investment is Dominion Energy. It's another utility with a less consistent track record than NextEra, but it comes at a cheaper price and with a higher annual dividend yield at 3.3%.
Investors may be raising their eyebrows that Dominion Energy's quarterly dividend is now $0.63 a share, two-thirds of what it was a year ago. Yet there's an argument that Dominion's cut was the right decision for its business.
After losing billions from the failed Atlantic Coast Pipeline, Dominion has been hard at work adjusting its strategy to invest in more profitable assets. That kind of thinking has led it toward a higher concentration of renewable energy investments, which Dominion believes will produce stable earnings over the long term.
Dominion has also been investing heavily in "renewable natural gas." It expects its RNG portfolio to more than triple in the second half of the decade -- a strategy that will reduce the company's carbon footprint while diversifying its revenue stream. Unlike conventional natural gas, which is a fossil fuel, RNG is made by capturing and using methane produced from the decomposition of waste. RNG is typically produced from garbage in landfills or animal manure in the agricultural industry.
Dominion Energy has spent the last 15 years transitioning its portfolio away from coal toward natural gas. Over the next 15 years, it aims to shift a great deal of its portfolio from natural gas toward renewables. In addition to corporate objectives, favorable federal and state policy could accelerate Dominion's renewable investments. In its second-quarter 2021 earnings call, management noted the passing of the Virginia Clean Economy Act as a significant step in the energy transition (Dominion's home state and major place of operation is Virginia). "We now have an obligation to seek approval for a substantial number of renewables over the course of the next 1.5 decades, solar, offshore wind, storage, all of that," said Dominion Energy CEO, Bob Blue. "And we're going to need to modify the grid in order to make sure that we keep operating in that environment."
In sum, Dominion Energy looks like a dividend stock with stable earnings and exciting investments strong enough to withstand a market crash.
