One of the most exciting areas of the broader energy sector today is probably the clean energy niche, because the world is on a multi-decade transition from carbon fuels, like coal and oil, to cleaner energy sources, like solar and wind. But it's important to focus on large, diversified companies that can support the spending needed to grow, and which have material internal investment pipelines. Brookfield Renewable Corp. (BEPC -1.42%) and NextEra Energy (NEE -0.74%) are two stocks that are ready to benefit all along the way.
The focused clean energy play
Brookfield Renewable is the pure play here, with its entire portfolio dedicated to clean energy assets. However, there's an important nuance that investors should keep in mind. Roughly 50% of the company's revenue is derived from hydro-electric power. Water is a highly reliable base-load power source that has been used for hundreds of years (though not always to generate electricity). It is a very stable business that provides a foundation for the company to invest in newer technologies.
Those technologies include solar, wind, and things like battery storage. Altogether, Brookfield Renewable has a portfolio of 21 gigawatts of power today. But the real story is the 69 gigawatt pipeline of future projects, which suggests there is still years of growth ahead for this clean energy company. Simple math shows that the company is hoping to more than triple in size! And along the way, investors can collect a generous dividend that yielded 3.6% as of Friday's close.
The company's investments aren't just making it bigger, they are resulting in strong normalized funds from operations (FFO) growth. That figure expanded 18% year over year in the first quarter and was higher by 17% year over year in 2021. But there's one more subtle attraction, which is supported by ongoing strong normalized FFO growth -- The company's goal is to increase the dividend by roughly 5% to 9% each year.
A downbeat opportunity
NextEra Energy is a mixture of a regulated utility (it owns Florida Power & Light, the largest U.S. utility) and a clean energy business. Over the past 15 years this combination has led to average annualized earnings-per-share growth of 8.4%. That's an impressive number, since utility stocks are generally thought of as slow and steady performers. That is actually fairly accurate when considering one half of the business. Indeed, the company's regulated utility serves a similar function to the hydro investments at Brookfield Renewable, in that it helps support the faster-growing solar and wind business on the clean energy side of NextEra's operation.
NextEra, however, also lays claim to being the largest producer of solar and wind power on Earth. So this is no small side project meant to keep NextEra in sync with regulators. This is a very real growth business for the company, which has plans to spend as much as $95 billion on capital investments between 2022 and 2025, with the goal of roughly doubling the size of the clean energy business's solar and wind capacity (and increasing storage capacity by as much as eight times).
In other words, the long-term growth story still looks largely the same. But there are some near-term headwinds, including supply chain disruptions and tariff issues, that have caused some concerns. Thus, investors have pushed the shares lower. They currently sit about 15% below their recent highs, which is actually about a typical drawdown for NextEra Energy over the past decade (compared to a 350% gain over that span). If you like the long-term clean energy story here, this could be an interesting entry point for long-term income investors, particularly given the company's status as a Dividend Aristocrat. The stock's yield is modest at around 2%, but the dividend has grown at a 10% annualized clip over the past decade which is huge for a utility.
Thinking about the future
Oil and natural gas are far from obsolete, but that just means that well-positioned clean energy investments like Brookfield Renewable and NextEra Energy probably have a very long future of growth ahead of them. If you can see that opportunity, then you'll probably want to do a deep dive on each of these companies. The pure play is Brookfield, but don't underestimate the value of pairing a regulated utility with a clean energy business, as NextEra has done.