Coal is a very dirty fuel, and it is quickly being displaced by cleaner options like solar and wind. But the bigger winner of late has been natural gas, even as there has been massive growth in renewable power. Meanwhile, inflation has made building offshore wind less competitive, leading some companies to pull back from the space.
The takeaway from these examples is that it isn't exactly clear which cleaner energy options will end up winning the day. But as an investor, you don't necessarily need to care if you buy the right stock or exchange traded fund (ETF).
The clean future is still wide open
There is very little doubt that the world is quickly shifting the energy sources it uses, going from dirty carbon fuels toward clean and cleaner sources. This process, however, isn't going to happen like flipping a light switch. It will be hugely expensive and require massive amounts of time to enact. Putting up a solar farm or wind farm isn't an easy process, from permitting to funding to construction. And the world consumes a shocking amount of energy, which should increase over time as the world's population increases.
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That means that there is a long runway for investors if they want to benefit from the changes taking place in the broader energy sector. But which power option should you back with your hard-earned dollars? That answer isn't clear, and there are a lot of options beyond simple solar and wind. For example, battery storage is increasingly important. What about up and coming hydrogen? Offshore wind is materially different from onshore wind. And how about the role nuclear power might play in all of this, given that it is a carbon-free source of energy?
Instead of trying to pick one type of energy technology, you would probably be better off investing in a host of different technologies. On that score, iShares Global Clean Energy ETF (ICLN 1.15%) could be a solid starting point. The fund is sizable, with over $3 billion in assets, and has a reasonable expense ratio of 0.41%. But what's most interesting about it is probably its portfolio.
The largest investments in the exchange traded fund's portfolio are utilities (roughly 30% of assets), renewable electricity (22%), semiconductors and semiconductor equipment (a combined 24%), and electrical components and equipment (a combined 18%). In other words, it is broadly invested in the theme of clean energy, which gives you the opportunity to punt.
What if you still want to pick a stock?
Some investors like more control over what they own than they get with an ETF. That's understandable, but it shouldn't stand in the way of you investing in the clean energy space. For example, Brookfield Renewable Partners (BEP 0.19%) (BEPC 0.09%) takes a similar approach on the diversification front, but directly owns physical clean energy assets. The core of its portfolio is hydroelectric power (about 50% of cash flows), with solar, wind, and other assets (such as batteries) making up the rest.
What's extra interesting here is that Brookfield Renewable Partners has increased its dividend annually since 2016 at a compound annual rate of roughly 6%. That's right in line with management's 5% to 9% long-term goal. The current yield is around 5% -- you can buy it in two different forms that have slightly different yields, a limited partnership or a traditional corporation -- so income investors will probably find it attractive.
You could also consider a utility like NextEra Energy (NEE -1.36%) if you'd like to hedge your bets a little bit. NextEra owns the largest regulated electric utility in Florida, and uses that foundation to invest in clean energy. It has a far more modest yield of around 2.8%. That said, the company has increased its dividend annually for roughly three decades, and the compound annual growth over the past 10 years was a heady 10%. That's huge for a utility, which makes this a good option for growth and income investors. The key here, however, is that NextEra is going to put cash to work where it believes it can make a good return on its investment. That saves you from having to pick a technology in the fast-changing clean energy market.
Plenty of options for your portfolio
At the end of the day, there's no one clear answer about what the energy future will look like. It is most likely to be something along the lines of "all of the above." And in that scenario, you'll want to have broad exposure to the clean energy sector instead of trying to cherry pick technologies. An ETF like iShares Global Clean Energy can do that for you, but so can Brookfield Renewable Partners and NextEra Energy. It all depends on how you want to play the clean energy space.
