Investing in Top Renewable Energy Stocks

Updated: Oct. 5, 2020, 4:29 p.m.

The global economy is slowly switching power sources, pivoting away from greenhouse-gas-emitting fossil fuels toward cleaner and renewable alternatives. These green energy sources include:

  • Wind
  • Solar
  • Hydro
  • Biomass
  • Geothermal
  • Ocean waves and currents

This transition to clean energy will take trillions of dollars and many decades to complete. However, it has the potential to make investors a lot of money. Here's a look at how to invest in this exciting sector.

Roof covered in solar panels with skyscrapers in background

Image source: Getty Images

How fast is renewable energy growing?

Renewable energy is growing at an exponential rate. According to the International Energy Agency (IEA), renewables reached 25% of global electricity generation capacity in 2018. The IEA sees renewable energy generating capacity growing by another 50% through 2024 under its base-case scenario, with even faster growth possible if governments put the right policies and financial incentives in place.

The IEA sees the brightest future for solar, projecting that this technology will power the majority of that growth, accounting for 700 gigawatts (GW) of the 1,200 GW in anticipated new capacity additions through 2024. Onshore wind should be the next-largest contributor at 300 GW, followed by hydropower at more than 100 GW and offshore wind at about 50 GW. Given that outlook, companies focused on the solar sector appear to have the best growth prospects in the coming years.

One potential headwind, however, that could hold back clean energy development is funding. There's more investment needed than available capital, which is both a challenge and an opportunity.

How to find good renewable energy investments

Renewable energy companies that generate free cash flow and have strong balance sheets have a competitive advantage over financially weaker rivals, since they have greater access to the capital needed to finance growth. That's why investors should focus their attention on financially strong clean energy companies.

The sheer growth potential of the renewable energy sector provides the opportunity for any company focused on the industry to thrive. However, not all will, because growing for the sake of growth won't enrich shareholders. Instead, investors should seek companies that wisely allocate capital to renewable energy projects that generate attractive returns on investment. Smart capital allocation is essential to maintaining a strong financial profile.

What are the top renewable energy stocks?

With those characteristics in mind, here are some of the best stocks in the renewable energy sector:

Here's a closer look at these standouts in the alternative energy sector.

1. Brookfield Renewable Partners

Brookfield Renewable Partners (NYSE:BEP) is one of the world's largest publicly traded renewable energy companies. It operates a global, multi-technology platform, which includes hydroelectric, wind, and solar energy generation facilities, as well as energy storage assets.

Brookfield sells the bulk of the power it produces under long-term, fixed-rate power purchase agreements (PPAs). Those contracts provide it with stable cash flow, which it uses to pay an attractive dividend and invest in expanding its portfolio. The company also boasts a strong balance sheet with one of the highest investment-grade bond ratings in the renewable energy sector, along with lots of liquidity -- cash and available credit -- to help finance growth. In Brookfield's view, it has the financial capacity to invest $4 billion into expanding its renewable energy portfolio through 2024, with a focus on new solar energy developments. These investments should power enough robust cash flow growth to support 5% to 9% yearly increases in its dividend.

By leveraging its strong financial profile to expand its solar energy platform, Brookfield should have the power to continue producing strong investment returns in the coming years.

2. First Solar

First Solar (NASDAQ:FSLR) is one of the leaders in developing thin-film solar panels. These larger modules produce electricity at a lower cost per watt than traditional silicon-based panels. They also perform better in hot and humid conditions as well as shed snow and debris quicker. Those characteristics make them ideal for utility-scale applications.

One factor that makes First Solar stand out in the panel manufacturing sector is its strong balance sheet. The company routinely carries a large net cash position, which provides it with interest income. Most of its competitors, on the other hand, have lots of debt on their balance sheets and are therefore paying interest to third-party lenders. First Solar's financial strength not only further reduces its costs, but also provides it with the ability to continue expanding its manufacturing capacity.

While First Solar doesn't have the stable cash flow profile of a company like Brookfield, it provides investors with more growth potential as it expands its solar panel manufacturing capacity to meet red-hot demand.

3. NextEra Energy

NextEra Energy (NYSE:NEE) operates two business segments:

  • Rate-regulated electric utilities that distribute power to consumers and businesses.
  • A competitive energy segment that generates electricity and transports natural gas under long-term, fixed-fee agreements.

These entities combine to produce more energy from the wind and sun than any other company in the world. They also generate steady cash flow, which provides NextEra with money to pay dividends and invest in expanding its operations.

NextEra complements its stable operations with one of the highest credit ratings among the largest electric utilities. It also controls renewable energy yieldco NextEra Energy Partners (NYSE:NEP), which provides additional investment capacity because it can sell contracted clean energy assets to its affiliate for cash to reinvest in new opportunities.

The company has the financial capacity to invest tens of billions of dollars in the coming years into developing new renewable energy projects, with an outsized portion of that going toward solar energy. Those investments should power earnings growth of at least 6% to 8% per year through 2022, while allowing it to increase its dividend by about 10% annually during that time frame. Those dual growth drivers should provide NextEra with the power to continue generating market-beating total stock returns in the coming years.

Related topics

The top renewable energy stocks have a bright future

The renewable energy sector represents a massive opportunity for investors. However, investors must pick stocks carefully, since not all will capture the full extent of this opportunity. Two key characteristics to look for are a strong balance sheet and a solar-focused growth profile, since those factors could give a company the power to generate higher returns.