The world is moving toward renewable energy for several reasons. It's cleaner than fossil fuels, and increasingly more affordable.
Similarly, more investors are recognizing that renewable-related stocks should be a part of their portfolios. So, what two stocks in the category can you own for less than $500? Here, I'll cover two: NextEra Energy (NEE -0.11%) and Tesla (TSLA 2.50%).
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NextEra Energy
When investors buy shares of NextEra Energy, it's like getting two stocks for the price of one. That's because NextEra operates two very different segments.
On one hand, the company operates Florida Power & Light, America's largest electric utility. This side of the business is stable and generates consistent cash flows -- typical for a regulated utility.
However, it's the second segment that adds the pizzazz. NextEra Energy Resources is a leader in renewable energy generation. Through a combination of wind, solar, and nuclear plants, it boasts over 27,400 megawatts of clean power generating capacity.
Together, these two halves make NextEra a compelling investment. Its traditional utility business offers consistency, while its renewable segment offers upside potential as the world transitions to a clean energy future.
In addition, NextEra pays a $1.87 dividend, resulting in a dividend yield of 2.5%. It's far from the largest dividend you'll find in the utility sector, but it's nevertheless an additional bonus to a stock with upside potential.
From a valuation perspective, NextEra's current price-to-earnings ratio of 23 is significantly below its three-year average of 50, driven by three factors: higher capital expenditures, higher debt levels, and higher interest rates. I think investors should view the higher spending and subsequent debt as necessary, given NextEra's desire to grow its renewable energy portfolio. On the other hand, investors should remember that higher interest rates seem here to stay, which could make it more challenging for NextEra to service its $68 billion in net debt.
Nevertheless, NextEra is a stock to target for investors eager to add a stock with some -- but not solely -- exposure to renewable energy.
Tesla
The world is also transitioning away from internal combustion engines to electric vehicles (EVs). For that reason, Tesla is a no-brainer choice if you're looking for a renewable energy stock to own.
Simply put, Tesla is succeeding at something many other companies have tried and failed: Making EVs at scale. Critically, Tesla isn't just making EVs in huge numbers -- it's also selling them for a profit.
Granted, there are concerns about declining margins due to the company's recent price cuts. And if demand remains soft, due to a weakening economy, high interest rates, or some other factor, Tesla may have to rethink its approach.
However, I believe that Tesla -- and CEO Elon Musk -- will find a way to stabilize margins as the company's new factories come online.
While that process plays out, investors can rest assured that the company's balance sheet remains in excellent shape. Tesla currently has over $22.4 billion in cash on hand and less than $5.6 billion in debt. And while it's true that free cash flow has dipped from its recent highs, it's still $5.7 billion over the last 12 months. Even though Tesla announced that it plans to spend between $7 billion to $9 billion in 2023 on capital expenditures -- including a new factory in Mexico --I believe Tesla has enough cash flow to support a modest share buyback program.
And so, for long-term bulls, now might be the time to load up on shares.
