Business history is filled with stories of emerging sectors that grow too fast and then have to suffer through a shake-out period. Trains, automobiles, and computers are just a few examples. One area that's seen the same dynamic recently is clean energy.
There's huge potential, but picking the winners from the losers isn't an easy task, either in terms of the technology or the individual companies involved. But there are ways that you can be involved in the clean energy rollout without having to pick a winner. Let's look at three potential ways.
Take an all-of-the-above approach to your picks
The impact of so-called greenhouse gases is well-documented, with carbon dioxide being one of the biggest culprits. The burning of carbon fuels, from coal to oil to natural gas, produces carbon dioxide which collects in the atmosphere and contributes to its warming. This is why the world is moving toward energy sources that aren't powered by carbon fuels.
The energy shift taking place is a very clear and real trend, though it is slow-moving. The big story today is usually solar and wind power, but there are other low-carbon sources of energy, including hydropower and nuclear. Which is going to be the dominant energy source of the future? Hard to tell, but the most likely outcome is likely to be "all of the above."
That's why investors looking to get into the clean energy space might like Brookfield Renewable Partners (BEP 0.19%). This limited partnership has a global footprint with generating assets across the hydro, solar, and wind categories. Its mandate is wide enough that it could probably also own nuclear power assets if it made financial sense. Today Brookfield Renewable Partners has 32 gigawatts of production capacity, but it has a backlog of future projects of 132 gigawatts. In other words, there's a lot of growth built into the clean energy pipeline here.
The units have fallen along with the broader clean energy space, but that's pushed the distribution yield up to an attractive 4.5%. The distribution, meanwhile, has been increased annually for over a decade. The long-term target is to increase distributions annually by between 5% and 9%. Dividend growth investors might find it an appealing option.
Spread your bets in two ways
While Brookfield Renewable Partners' portfolio of assets spans clean energy generation types, Hannon Armstrong (HASI 2.12%) takes a slightly different approach. This real estate investment trust (REIT) provides loans to developers and owners of clean energy assets. Generally, the assets have long-term power purchase agreements that back their cash flows, which gives greater clarity to the ability of the assets to support the loans.
What's interesting here is that Hannon Armstong isn't trying to pick a winning technology or even a winning company. It just wants to build a portfolio of loans that are backed by strong, predictable cash flows. That's what supports the REIT's ability to provide investors with regular dividend payments. The current dividend yield is 6.4%; it's worth noting that the clean energy pullback has boosted that figure back toward historical highs. Hannon Armstrong has increased its dividend in each of the past five years.
Looking forward, the company believes there's a $5 billion pipeline of potential investments to support future growth. While that number is huge, Hannon Armstong won't end up making that many loans. But it is a sizable pool from which management can cherry-pick attractive investment opportunities as it continues to grow its loan portfolio.
The easy way to diversify
If you don't want to own a single stock, even one that has a diversified approach to clean energy investing, there's still another option -- exchange-traded funds (ETFs) like iShares Global Clean Energy ETF (ICLN 1.15%). This is something of a punt investment option, as it owns a portfolio of stocks tied to clean energy, including notable names like First Solar, Enphase Energy, and Plug Power. That said, it also includes more traditional energy companies, like utility Consolidated Edison, that are dipping their toes into the clean energy space (utilities make up about 20% of the portfolio). In other words, it's a broad mix.
What's attractive here is that you get a lot of diversification (there are roughly 100 holdings) without a huge amount of costs, given the management fee of just 0.4%. That said, the dividend yield is just 1% or so, which is pretty miserly compared to those of the two options above. That's to be expected, though, given that many of the stocks iShares Global Clean Energy ETF owns are small and relatively young. But the goal here isn't to generate income -- it is to broadly track the global clean energy sector. If that's your goal too, it could be a solid fit for your portfolio.
Picking a winner
Although Brookfield Renewable Partners and Hannon Armstrong are pretty specific investment opportunities, iShares Global Clean Energy ETF is one example among many ETFs you could choose from. The key is to figure out what you actually want to achieve. If the answer is broad exposure, an ETF would likely be the best option. Brookfield Renewable Partners could do the trick if you'd like to generate some income and dividend growth while getting exposure to different power sources. If you wanted to avoid company-specific issues, then high-yield Hannon Armstrong's approach of loaning money across different power sources and companies might be most attractive.
