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This Trend Will Dominate the Stock Market for the Next 10 Years

By Daniel Foelber - Sep 30, 2021 at 8:32AM

Key Points

  • The path to a carbon neutral world by 2050 will require a host of changes to be made in the 2020s.
  • Income-generating renewable energy stocks offer a conservative way to invest in this emerging trend.
  • Growth stocks in the renewable energy sector offer more potential upside, but carry more risks for investors.

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Patient investors should reap rich rewards from investing in sustainability by way of the renewable energy and electric vehicle industries.

One of the best trends to bet on over the next decade could be the growing adoption of sustainable energy technologies -- in particular,  renewable energy and electric vehicles (EVs). Costs for both continue to come down, incentives are strong, and 2020 saw a huge push in public policy and corporate objectives toward the goal of carbon neutrality.

Thinking about long-term trends helps give an investment strategy purpose. Many investors made lots of money over the last decade by simply recognizing several growing trends -- all of which were largely built upon a larger and faster internet. Just as software, smartphones, and streaming defined the 2010s, sustainability could be the best investment of the 2020s. Let's break down a few different approaches to profiting from this rising mega-trend.

A man wearing a hard hat looks up at a row of wind turbines.

Image source: Getty Images.

A trend ready for a breakout

Emission reduction target dates vary. Many companies have set medium-term goals for achieving cuts to a certain point by 2025 or even 2030, but the most popular objective seems to be hitting carbon neutrality by 2050. Whether or not that happens will depend heavily on what occurs over the next decade, notes the International Energy Agency (IEA). "Net zero by 2050 hinges on an unprecedented clean technology push to 2030," the agency says its Net Zero by 2050 report.

The IEA estimates that the world economy will be 40% larger by 2030 but will need to consume 7% less energy than it does now to stay on track toward a collective 2050 goal. That may sound impossible, but it's not. Indeed, as the report explains, "all the technologies needed to achieve the necessary deep cuts in global emissions by 2030 already exist, and the policies that can drive their deployment are already proven." Similarly, President Biden set 2030 as the target to reduce U.S. greenhouse gas emissions by at least 50% from 2005 levels. 

The income strategy

While it's fairly clear that the world is accelerating its energy transition away from fossil fuels and toward renewable energy, picking the right investments to capitalize on this shift can be a daunting task. After all, the energy industry includes power generation, industrial production, transportation, residential, commercial use, and other categories.

Income investors may lean toward dividend-paying utilities like NextEra Energy, Dominion Energy, or Duke Energy. There's also the category of companies that finance renewable energy projects, featuring such names as Hannon Armstrong.

Similarly, Brookfield Renewable ( BEP -0.56% ) is one of the largest U.S.-based renewable power companies. It distributes the majority of its earnings to investors through dividends, and management has set a goal of increasing its dividend payout by 5% to 9% annually. 

Oil and coal consumption should continue to decrease, but natural gas is likely to keep playing a key role as an energy source that complements renewables. Kinder Morgan is a pipeline giant with a greater than 6% dividend yield at current share prices and a great balance sheet that could pair well with more pure-play renewable energy dividend stocks.

The growth strategy

For risk-tolerant investors, investing in growth stocks can be a great way to expose a portfolio to upside. Companies like SolarEdge Technologies and Enphase Energy have been some of the best-performing  stocks over the last few years. These companies manufacture inverters, energy storage systems, and components for solar power deployments. Demand for those has grown in tandem with the growth of the global solar energy industry. Over the next 10 years, smaller companies with more potential like SunPower could be an even better way to invest in the solar boom.

Other under-the-radar options for capitalizing on the green energy push include Array Technologies, a leader in ground-mounted solar tracking devices, and TPI Composites, the world's largest independent manufacturer of wind blades.

In addition, manufacturers of electric vehicles and their associated infrastructure could be a great fit for a lot of portfolios. Tesla was the best-performing large-cap stock in 2020. It remains the EV industry leader, but there's an argument that new players could be even better investments going forward. From legacy automakers like Ford to charging infrastructure companies like ChargePoint to up-and-coming pure-play EV automakers like Lucid Group -- there are plenty of exciting ways to invest in increased EV adoption.

Diversifying has never been easier 

No matter your risk profile, taking a basket approach to investing in sustainability is probably the best strategy for protecting your portfolio against the downsides while exposing it to the potential upsides. Some investors may believe there is more profit to be made in wind energy than solar energy, favor hydrogen fuel cells over electric vehicles, or see more upside in compressed natural gas than liquefied natural gas. The beauty of investing today is that you can purchase stocks, exchange-traded funds, or index funds with little to no fees. That low-cost structure makes it easier to diversify and dollar-cost average into positions over time.

By 2030, the world will look much different than it does today. The idea that the clean energy sector will continue to grow well into the future seems like one of the safest bets out there.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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